The US government will boost its stake in Citigroup Inc to as much as 36%, bolstering the banking giant’s capital base in one of the most dramatic efforts yet to prop up the ailing banking industry.
The government will swap up to $25 billion of its preferred shares into common stock, dramatically diluting existing shareholders. Citigroup will stop paying dividends on its preferred and common stock, and promised to shake up its board of directors.
The announcement on Friday does not immediately inject more money into Citigroup, but gives CEO Vikram Pandit more time to shrink the third-largest US bank, sell unwanted assets and restore investor confidence. It also gives the government a far greater say in Citigroup’s affairs, short of an outright nationalization.
“The government is the new boss,” said Mike Holland, the founder of money manager Holland & Co in New York. “Every major decision is something that is not going to come out of Park Avenue, but is going to come from Washington DC.”
Separately, Citigroup said it recorded more than $8.9 billion of charges in the most recent quarter to write down goodwill and its Nikko Asset Management business in Japan.
The charges boost the Q4 loss to above $17 billion, and Citigroup’s full-year loss to $27.7 billion. “This capital should take confidence issues off the table even in a stressed environment,” Pandit said in a conference call.
In premarket trading, Citigroup shares were down 96 cents at $1.50. Standard & Poor’s 500 stock index futures fell 2.4% after the US Commerce Department issued a revised estimate showing gross domestic product falling at an annualized 6.2% in the Q4, a much steeper drop than analysts expected.
Other banks also tumbled, with Bank of America Corp down 17%, Wells Fargo & Co down 12% and JPMorgan Chase & Co down 3.8%. US index futures hit session lows, hit by the news and the upcoming release of economic data, which could show the US economy contracted by more than initially reported in the Q4.
The agreement followed more than a week of negotiations between the Treasury and Citigroup, once the world’s largest financial services group.
President Barack Obama’s administration signaled broad support for the nation’s banks this week, with a fiscal 2010 budget plan including a “placeholder” provision for the Treasury to buy $750 billion more in securities from the bank sector.
On Wednesday, the US Treasury pledged to provide sufficient capital to about 20 of the largest US banks that undergo a “stress test” to assess their ability to cope with the possibility of a worse-than-expected recession. Citigroup would be subject to that stress test, the Treasury said on Friday.
Banks judged to need more capital will have six months to raise funds from private investors or accept the Treasury’s offer of buying preferred shares convertible into common equity.
The Treasury also will allow other banks that previously received capital injections under the $700 billion bailout program to convert those preferred stock investments to convertible preferred shares and later to common equity to help boost capital ratios. (Reuters)