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.”