U.S. Agrees to Raise Its Stake in Citigroup

By ERIC DASH
Published: February 27, 2009

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 to 36 percent, from 8 percent.

The chief executive, Vikram S. Pandit, will remain, but Citigroup will shake up its board so that it has a majority of new independent directors, a move that federal regulators had been pursuing. The announcement comes as the bank said its 2008 loss had spiraled to $27.7 billion, among the largest in corporate history. Under the deal, the Treasury Department agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock, giving taxpayers more risk, but more potential for profit if the company recovers.

The Treasury will convert its stake to the extent that Citigroup can persuade private investors, including several foreign government investment funds, to go along. Treasury will match the private investors’ conversions dollar for dollar, and do so at the most favorable price and terms offered to any other private investor.

The plan was intended to reassure the markets and stabilize Citigroup, but plenty of uncertainty remains. Each rescue has made Citigroup more financially sound, yet its shares — a crucial sign of confidence in the company — continue to tumble. Shares were down 36 percent, to $1.57, on Friday afternoon, and analysts worry that regulators are running out of options.

Unlike other troubled banks, Citigroup may be both too big to fail and too unwieldy for the government to takeover. Nationalization is also politically unpalatable. Instead, analysts say, Citigroup may be forced to downsize and may require additional taxpayer support to nurse itself back to health. In others words, the ailing financial giant may just muddle along.

Mr. Pandit described the exchange as a “bridge to profitability” that was intended to appease the markets. On a conference call Friday morning with investors, he said the bank was committed to its remaining businesses and strategy. Mr. Pandit also tried to squelch concern that the government would play a more influential role at the company. “We are going to run Citi for the shareholders,” he added.

Inside Citigroup, bankers and traders are already buzzing about what life may be like if the government deepens its involvement. Investors are also worried that Citigroup’s performance will suffer.

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, have become Citigroup’s single largest shareholder. The government will not put in any additional money for now, but some analysts believe Citigroup may require more down the road.

The move is one of the most drastic steps federal officials have taken to prevent the collapse of a systemically critical institution. The government also took a major ownership stake in the American International Group, and seized control of the mortgage lending giants Fannie Mae and Freddie Mac in September. So far, not one of those deals has turned out well.

The Obama 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 deteriorating financial condition made it almost inevitable the government would have to convert 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 if a new “stress test” shows they need more capital to cope with worsening losses. 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.

Citigroup has been pursuing similar plans with preferred stockholders, including several foreign governments investment funds. The bank has offered to exchange up to $27.5 billion of preferred stock into common shares at a price of $3.25 a share, a 32 percent premium over Thursday’s close. It will do so by issuing warrants. If the transaction is not approved by Citigroup shareholders, those securities will carry a 9 percent dividend that will increase quarterly.

On Friday, the bank announced that the government of Singapore, Prince Walid bin Talal of Saudi Arabia and Capital Research Global Investors and Capital World investors would participate in the share conversion.

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