Citigroup has struck a deal that allows it to shore up a key financial measure while giving the government up to a 36% stake in the beleaguered bank, vs. 8% now.
The deal is the government's third major effort to turn around Citigroup c, the nation's third-largest bank by assets. Already, the government holds $45 billion of preferred shares in Citigroup and has agreed to share losses on $301 billion of troubled bank assets.
In the latest action, the government will exchange some of its preferred shares in Citigroup for common shares, matching the actions of private investors, including The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors.
In a conference call Friday, Citigroup Chief Financial Officer Gary Crittenden said the company has gotten a commitment from "almost all of the large private shareholders that they will participate in this conversion." The conversion of shares from preferred to common will not require more taxpayer money.
The conversion boosts a key measure of financial health for Citigroup: tangible common equity. Investors and the government have been increasingly turning to this yardstick to gauge banks' financial health, and their capital on hand. That should help Citi with the government's "stress test" of its financial condition.
Tangible common equity, also known as tangible equity capital or sometimes tangible common book value, is defined as book value, minus intangible assets, goodwill, and preferred equity, according to Wikinvest. "Tangible common equity can be considered the most conservative valuation of a company and the best approximation of the company's value should it be forced to liquidate," the definition says.
The conversion of preferred stock to common shares, however, does dilute the value of existing Citi common stock.
And as part of the agreement, Citi will suspend dividends on both its common stock and its preferred shares, which will help the bank conserve cash.
Citi will also reshape its board of directors, by installing a majority of new, independent directors. And it will record a goodwill impairment charge of about $9.6 billion in the fourth quarter because of the deteriorating global economic situation.
The goodwill charge was added to Citi's 2008 results along with a $374 million impairment charge tied to its Nikko Asset Management unit. The charges resulted in Citi revising its 2008 loss to $27.7 billion, or $5.59 per share.
The government's talks to expand its stake in Citigroup had raised concern that the banking system or key banks would have to be "nationalized" to restore them to health.
Citigroup CEO Vikram Pandit said this deal with the government "should put that concern (about nationalization) to rest."
Pandit said Friday, "This securities exchange has one goal — to increase our tangible common equity ... an important measure. This transaction — which requires no additional investment from U.S. taxpayers — does not change Citi's strategy, operations or governance."
Federal officials have said they do not want to nationalize major U.S. banks, though they might have to temporarily take a large stake in some big banks.
Earlier this week bank regulators, including the Treasury Department and the Federal Reserve, detailed plans to "stress test " 19 large lenders — those with assets of $100 billion or more — to determine whether they have enough cushion to survive a sharper downturn in the global economy.
At the conclusion of the stress tests, expected by the end of April, regulators will tell the banks how much capital they need and will commit to provide federal aid, by buying preferred shares that could later be converted into common stock. But before that, banks will be given six months to see if they can instead raise capital from private sources.
The Federal Deposit Insurance Corp. also said Thursday that the number of problem U.S. banks has spiked, and voted today to increase premiums it charges to lenders, to replenish its insurance fund. The FDIC, through 2009, will insure 100% of non-interest-bearing accounts, such as those used by small businesses to process payroll. Other accounts are insured up to $250,000.
President Obama has said the government may need more money, above the $700 billion in last year's financial rescue law. The White House budget plan released Thursday included a $250 billion reserve that could support up to $750 billion in new aid — though the administration has not yet decided how much will be needed.
The banking crisis is being felt worldwide. The World Bank Group, European Investment Bank and European Bank for Reconstruction and Development jointly announced Friday that they will provide up to 25.4 billion euros to support Eastern Europe's banking sector.
Investors sent shares of Citigroup plunging on anxiety about the deal. Citi shares fell 42.7%, or $1.05, to $1.50 a share.
Sue Kirchhoff reported from Washington