Friday, February 27, 2009

U.S. to control up to 36% of Citi

NEW YORK (CNNMoney.com) -- The U.S. government waded deeper into the bailout of one of the nation's largest banks Friday when it announced a deal that will give it control over as much as 36% of Citigroup's common stock.
Citigroup shares tumbled 46% in premarket trading.
The deal will convert preferred shares that Treasury already holds in Citigroup for common shares, a shift that is designed to improve the embattled bank's capital base, which in turn will hopefully allow it to increase its lending.
The U.S. government has already given Citigroup $45 billion, for which it received preferred shares and warrants in the company.
The new deal Friday did not give the bank any additional taxpayer dollars. But the government is taking on a greater risk by assuming more volatile common shares. The market price is well below the $3.25 per-share conversion price the government is paying.
Taxpayers will also lose roughly $2 billion in dividends, because the preferred shares they are giving up paid 8% dividends. Citi suspended its common share dividend as part of the agreement.
The Treasury is trying to prop-up one of the nation's largest banks as a key part of its efforts of fixing the battered banking system.
For Citigroup, the conversion is important because it increases the bank's tangible equity, making an improvement in the bank's troubled balance sheet.
Terms of the deal
In the deal, Treasury will convert up to $25 billion of preferred shares, matching dollars that Citigroup is able to bring in from other investors, such as sovereign wealth funds.
But the move will reduce the stake that existing shareholders hold in the bank to as little as 26%. New common share investors, including other current preferred shareholders who are also expected to convert their shares to common, will own the remaining stake which could be as much as 38%.
Shares of Citigroup, a component of the Dow Jones industrial average, have plunged about 90% in the past year. With the large dilution of existing share value, Citi plunged another 40% in pre-market trading after the announcement. Still the bank hopes that the move will eventually help rebuild its battered share price.
In a call with investors CEO Vikram Pandit said the decision was difficult because of what it would do to current investors, but that the bank had little choice.
"In the end, our business is about confidence," he said. "We wanted to take definitive steps to put all capital issues aside."
Pandit also insisted that Citi management would continue to be in charge, not the federal government or federal regulators, and that decisions would be made to maximize profits and shareholder return, rather than public policy agenda.
"For those people who have a concern about nationalization, this should put those concerns to rest," he said.
Under the deal, a majority of Citigroup's independent directors will be replaced. But CEO Vikram Pandit and Chairman Richard Parsons will retain their positions at one of the nation's three largest bank holding companies.
The Federal Deposit Insurance Corp. considers a bank to be critically undercapitalized if the tangible equity-to-asset ratio is 2% or less. Citi's ratio hovers around 1.5% now.
Citi's statement said the agreement could increase the tangible common equity of the company from the fourth-quarter level of $29.7 billion to as much as $81 billion.
At the same time, Citigroup (C, Fortune 500) announced a pretax $9.6 billion charge in the recently completed fourth quarter, resulting in a roughly 50% increase in its 2008 loss.
The charge was to write down the value of the goodwill carried on its balance sheet for some key business units. It came to $8.7 billion on an after-tax basis. The company said that will result in a full-year loss of $27.7 billion, up from the previously reported $18.7 billion.
Corporate goodwill is the value of a company operation carried on balance sheet beyond what can be attributed to its strict financial operations, placing a value such intangible items as the company's name, reputation and its customer relations.
The charge will not result in any cash drain for the company or reduce its tangible common equity. It is an accounting procedure that wipes out the goodwill of Citigroup's consumer banking operations in North America, Latin America and other key overseas markets.
When Citi announced its fourth-quarter results last month, it said it was continuing to review its goodwill to determine whether an impairment had occurred.