A Done Deal – US Treasury to increase ownership in Citigroup

We can stop saying if, and even when, in regards to the government takeover of Citigroup holdings. The government will now control 36% of Citigroup. This deal is considered a test model for more bank takeovers.

from NY Times

In its most daring bid yet to stabilize Citigroup, one of the nation’s largest and most troubled financial institutions, the Treasury Department announced on Friday that it would vastly increase its ownership of the struggling company.

After two multibillion-dollar lifelines failed to shore up Citigroup, the government will increase its stake in the company to 36 percent from 8 percent.

As part of the deal, Citi will shake up its board so that it has a majority of independent directors, Richard Parsons, the bank’s chairman, said in a statement. The change had been something federal regulators had already been pursuing, according to people close to the deal.

Under the deal, Citibank said that it would offer to exchange common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 a share, a 32 percent premium over Thursday’s closing price.

The government will match this exchange up to a maximum of $25 billion of its preferred stock at the same price. In its statement, the Treasury Department said the dollar-for-dollar match was intended to strengthen Citigroup’s capital base.

The government of Singapore Investment Corporation, Saudi Prince Walid bin Talal, Capital Research Global Investors and Capital World Investors have already agreed to participate in the exchange, Citibank said in a statement. Existing shareholders will own about 26 percent of the outstanding shares.

Citibank also said that it would record a goodwill impairment charge of about $9.6 billion write-down because of deterioration in the financial markets.

The transaction, which does not involve putting more government cash into the bank, will not increase the amount of Treasury’s investment in Citigroup, the Treasury said. The portion of the preferred securities that are not converted to common shares will be placed into new trust preferred securities, Citi said, with an 8 percent annual return.

The bank will also suspend dividends on its preferred shares and its common stock.

“This securities exchange has one goal — to increase our tangible common equity,” Citi’s chief executive, Vikram Pandit, said. “This transaction — which requires no additional investment from U.S. taxpayers — does not change Citi’s strategy, operations or governance. Our clients and partners will not be affected and will continue to receive the high level of service they expect from Citi around the world.”

The Obama administration deliberately stopped short of securing a majority or controlling interest in Citigroup, but will probably come under intense pressure to take a much larger role in shaping the bank’s direction. Taxpayers, after pumping more than $45 billion into the bank, will now become Citigroup’s single largest shareholder.

The move is one of the most drastic steps federal officials have taken to prevent the collapse of an institution deemed “too big too fail,” as its downfall could send shockwaves through the global markets. The government also took a major ownership stake in the American International Group, and seized control of Fannie Mae and Freddie Mac last September. So far, none of those deals have worked out well.

The administration has tried to keep the banks in private hands and tried to stamp out talk of nationalization. But Citigroup’s plunging share price and its desperate need for capital made it almost inevitable the government would have to raise its stake.

The deal is expected to serve as a model for other financial institutions. Other major banks could find themselves in a similar position in the coming weeks if a new “stress test” shows they do not have sufficient capital, or the right amount of common stock, to appease regulators. Administration officials say they will convert the government’s existing preferred stock investments into common shares and, if necessary, make additional investments to stabilize the banks.

The Citigroup deal tries to address a potential shortfall of common stock, which investors and regulators now demand. With the conversion of preferred shares to common shares, the government’s stake will rise to 36 percent from 8 percent, giving taxpayers more risk, but more potential for profit if the company recovers.

I guess all those nationalization debates on the blogosphere are moot at this point. Its happening people.

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