Citigroup gets new rescue, US may own 36 pct

NEW YORK/WASHINGTON, (Reuters) – The U.S. government  will boost its equity stake in Citigroup Inc to as much as 36  percent, bolstering the bank’s capital base in the latest  emergency effort to save the banking giant.

In its third attempt to prop up Citigroup in the past five  months, the government will convert up to $25 billion in  preferred shares to common stock. Existing shareholders could  see their ownership of the bank diluted by 74 percent.
While the latest rescue does not inject more money into  Citigroup, it gives the government more of a voting stake and  far greater influence over the bank’s operations, short of  outright nationalization. The White House said a higher U.S.  stake will help achieve a “better outcome” for the bank.

“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, D.C.”

New York-based Citigroup in October and November received  $45 billion of taxpayer money, as well as a government backstop  to cap losses on $301 billion of toxic assets.

Shares of Citigroup closed down 39 percent on Friday, and  touched their lowest level in at least 18 years. The market  value of what was once the world’s most valuable bank has  fallen to $8.2 billion, Reuters data show, from a peak above  $270 billion roughly two years ago.

U.S. Bancorp’s market value is more than three times  greater than Citigroup’s, though the regional bank’s asset base  is only one-seventh as large.

Moody’s Investors Service cut Citigroup debt one notch to  “A3,” its fourth-lowest investment grade, saying Citigroup is  likely to shrink, “which could diminish its relative importance  to the U.S. banking system over the long run.” Standard &  Poor’s affirmed its “A” rating, a notch higher.

Yesterday’s agreement calls for Citigroup to offer to exchange  common stock for up to $27.5 billion of its preferred shares at  $3.25 per share. The government will match the exchange up to  $25 billion, provided private investors do the same.

Citigroup will halt dividends on preferred and common  stock, but maintain payouts on trust preferred securities.
The agreement could be a template for other lenders that  have taken government money. It will boost Citigroup’s tangible  common equity ratio, a measure of capital, to between 5.4  percent and 8.1 percent from the fourth quarter’s 3 percent.

On a conference call, Chief Executive Vikram Pandit said  senior executives “completely remain in charge” of day-to-day  operations.

The bank will shake up its board and install a majority of  new, independent directors. Five of the board’s 15 members are  either not standing for reelection or will reach retirement age  by the time of Citigroup’s annual meeting in April.

“Investors want to see heads roll because they’re so angry  at the entire banking industry,” said Marshall Front, chairman  of Front Barnett Associates LLC in Chicago, which invests $500  million. “But Citigroup management is as well qualified to deal  with the problems the bank faces now as anyone, and would not  have the learning curve that new people would face.”

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