Report: Government considers bigger stake in Citi
By MarketWatch
Last update: 1:43 p.m. EST Feb. 23, 2009
SAN FRANCISCO (MarketWatch) - The U.S. government may take a 25% to 40% stake in Citigroup Inc.'s common shares to bolster the giant bank's financial strength in the face of mounting loan losses, according to a media report Monday.
Markets worldwide welcomed the report, which comes just after Citigroup's stock slumped to an 18-year low and Bank of America Corp. shares hit a record low on worries the two financial giants may be nationalized.
A story in the online edition of the Wall Street Journal, citing people familiar with the situation, reported that while the talks could still fall apart, discussions center on the government converting a lot of its current $45 billion preferred equity stake into Citigroup
The deal could leave the government holding 40% of the shares, but bank executives hope the stake will be closer to 25%, these people told the Journal. Citigroup made the proposal to its regulators, according to the report, which also noted the Obama administration hasn't indicated whether it supports the plan.
Chart of C
The move wouldn't cost taxpayers more money, but other Citigroup shareholders would see their holdings diluted, the report said.
A spokesman for Citigroup declined to comment, and a Treasury spokesman did not respond to an email.
On Monday, European markets advanced as investors welcomed the Citigroup news as well as reports that Royal Bank of Scotland is planning a major reorganization. Read the Europe Markets report.
Citigroup shares jumped 11% to $2.16 during afternoon action. That recouped some of Friday's losses.
Converting the government's preferred equity stake into common stock "would help boost the company's low tangible equity ratio (currently 1.5%), which we believe is too low given Citi's asset base," Stuart Plesser, a financials analyst at Standard & Poor's Equity Research, wrote in a note to investors.
"Such a move would be more psychological than tangible, as no real capital would be added to Citi," he added. "But it might help ease investors' concerns over the banking space."
In recent months, investors have focused more on tangible common equity ratios to measure banks' financial strength. This shows what common stock holders would theoretically get if an institution was shut down and its assets sold.
The ratio is more conservative that the Tier 1 capital ratio, which is used by regulators and banks. This ratio counts preferred securities as equity, as well as common shares.
In Citigroup's case, its tangible common equity ratio was 1.5% at the end of 2008, well below the 3% level that investors consider safe, the Wall Street Journal said on Monday.
The bank's Tier 1 capital ratio was 11.8%, well above what regulators consider well capitalized, the newspaper noted....
marketwatch.com{89B19FAF-B983-46D8-9E04-5CABA02C6309}&print=true&dist=printMidSection |
