Friday, February 27, 2009

Citigroup Gets Third Bailout as Government Plans to Raise Stake

By Bradley Keoun and Rebecca Christie (Bloomberg)

The U.S. government will raise its stake in Citigroup Inc. in the third attempt to bail out what was once the world’s biggest financial institution.

The plan will involve the Treasury Department converting as much as $25 billion of preferred shares into common stock, the Treasury Department said in a statement today. The government said it will make the swaps only if private holders agree to the same terms. The U.S. doesn’t immediately intend to inject additional money after channeling $45 billion to the New York- based company last year.

“This gradual step-by-step process doesn’t work, or has not worked so far,” said Marino Valensise, chief investment officer of London-based Baring Asset Management Ltd., who helps oversee about $30 billion for clients.

Citigroup Chief Executive Officer Vikram Pandit is trying to bolster confidence after his bank’s stock price sank to $1.95 last week -- the lowest price in 18 years. The government is supporting the company, which had 200 million customer accounts in more than 100 countries at the end of last year, because of concern its failure might roil already weak global markets.

Federal Reserve Chairman Ben S. Bernanke said Feb. 25 he wants to avoid nationalizing Citigroup and other large banks in a way that would wipe out shareholders and leave the U.S. in full control. Bernanke said the government might end up owning a “substantial minority” of the bank.

Citigroup rose 3 cents to $2.49 in German trading today before the announcement. The stock plummeted 90 percent during the past 12 months. Only Cincinnati-based Fifth Third Bancorp fell more of 24 companies on the KBW Bank Index.

Selling Businesses

The Treasury Department is injecting a fresh round of bailout funds into the nation’s banks to help them weather the recession. Regulators on Feb. 25 announced details of “stress tests” to determine how much capital banks will need should unemployment climb to 10.3 percent in 2010.

Pandit, 52, has been selling units to free up capital after Citigroup posted a record $27.7 billion loss in 2008. He said last month he planned to sell the bank’s CitiFinancial consumer- finance and Primerica life-insurance subsidiaries as soon as the market permits. He also struck a deal to sell majority control of the bank’s Smith Barney brokerage to Morgan Stanley.

As part of today’s deal with the government, Citigroup also agreed to reconstitute its board so that a majority of the directors are new and independent, Treasury said today.

The CEO has said he wants to refashion the financial- services behemoth, built in the 1980s and 1990s through a chain of acquisitions, into a global bank focused on retail branches, securities trading, investment banking and payment processing.

The government’s increasing control over the bank’s affairs grew apparent after the bank got $25 billion of bailout funds in October and another $20 billion in November. The bank also paid $7 billion of preferred stock for $301 billion of guarantees on mortgages, junk-grade loans and subprime-tainted securities.

Dividend Cut

Citigroup had to slash its quarterly dividend to 1 cent, accept restrictions on executive pay and limit luxury perks such as office renovations and unnecessary private-jet travel.

The bank also was pressed to participate in a foreclosure- prevention program favored by Federal Deposit Insurance Corp. Chairman Sheila Bair. The company consented to lawmakers’ demands that it support a bill, opposed by the banking industry, that gave bankruptcy judges the authority to write down mortgage principal.

Citigroup still faces scrutiny of whether it’s appropriately using the bailout funds. Some lawmakers have criticized its $20-million-a-year sponsorship of the New York Mets’ new baseball stadium in the New York City borough of Queens. Corporate-governance advocates say the bank is paying for millions of dollars of perks, including offices, secretaries and cars and drivers, for retired executives.

Citigroup said last week director Roberto Hernandez Ramirez will keep getting reimbursed for his use of private aircraft and other perks after he steps down from the board in April because of his continuing role as non-executive chairman of Citigroup subsidiary Banco Nacional de Mexico. The benefits, which also include an office, secretary and personal security, cost $2.61 million in 2007, according to a March regulatory filing.

1 comment:

Ralph said...

Not sure why the government would want to move taxpayers' investment lower down the capital structure. In case of a bankruptcy, taxpayers will be last in line to claim assets. To learn more go to www.newyorkshockexchange.com