Government boosts its stake in Citigroup; dividends ended

NEW YORK -- 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.

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.