财经观察 1784 --- US to own 40% of Bank

Taxpayers Could Own Up to 40% of Bank's Common Stock, Diluting Value of SharesArticle

By DAVID ENRICH and MONICA LANGLEY

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world's largest financial institutions. The proposal was made by Citigroup to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks.

The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup's share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their shares diluted.

The talks thus far have occurred largely between Citigroup and its regulators, the Federal Reserve Board and the Office of the Comptroller of the Currency, to clear the way for the plan to later go to the Obama administration.

A larger ownership stake by the federal government also likely would fuel speculation that other troubled banks will line up for similar agreements.

Bank of America Corp. said Sunday that it isn't discussing a larger ownership stake for the government. "There are no talks right now over that issue," said Bank of America spokesman Robert Stickler. "We see no reason to do that. We believe the goal of public policy should be to attract private capital into the bank, not to discourage it."

Citigroup's low share price already reflects, at least in part, a fear among shareholders that their stakes might be further diluted. A government move to take a big stake in the bank could backfire, potentially spurring investors to flee other banks, even healthier ones.

There's no universal agreement on what constitutes nationalization of a bank. In the U.K., the government already owns 43% of Lloyds Banking Group PLC, and last week it moved to increase its ownership of Royal Bank of Scotland Group PLC to 70% from 58%. Those two banks have been classified as "public-sector entities," and as much as £1.5 trillion ($2.136 trillion) of their liabilities have been moved over to the country's balance sheet.

The White House has knocked down recent speculation that the government is preparing to nationalize several large U.S. banks.

The U.S.'s intentions with Citigroup remain unclear. For instance, it's not yet known whether the government would seek a stronger hand in the New York's company's management or day-to-day operations.

As part of the plan, Citigroup officials hope to persuade private investors that have bought preferred shares -- such as the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority -- to follow the government's lead in converting some of those stakes into common stock, according to people familiar with the matter. That would further bolster an obscure but increasingly pivotal gauge of banks' capital known as "tangible common equity," or TCE.

The highly complex TCE measurement, one of several gauges of a bank's financial strength, gives weight to common shares -- thus the interest in converting perferred shares to common stock.

Details of the rescue remain in flux. Key questions, such as the price at which the government will convert its preferred stock into common shares, haven't been resolved.

And it's possible that other options will emerge to stabilize the company. For example, the Obama administration could decide to sit tight until the results of several new "stress tests" on major banks -- broad exams of their financial health now being mandated -- are known in a couple months, one official said.

Citigroup Chief Executive Vikram Pandit huddled Sunday with his senior executives to fine-tune its pitch to the Obama administration.

If the deal gets nailed down, it will be Washington's third effort to aid Citigroup since last fall. In October, the Treasury Department put a total of $125 billion into eight giant financial institutions, including $25 billion to Citigroup, in exchange for preferred shares and warrants to buy stock.

Then, shortly before Thanksgiving, the government agreed to infuse another $20 billion into Citigroup as its stock tumbled. It also agreed to protect the banking company against most losses on a $301 billion pool of assets.

Among the question marks looming over the current discussions is the future of Mr. Pandit and the company's board of directors.

In November, federal officials privately discussed the possibility of replacing Mr. Pandit, who became CEO in December 2007, as part of the sweeping rescue. But the government decided not to remove him, in large part due to a dearth of qualified replacements. Still, top government officials warned Mr. Pandit that a third trip to the taxpayer trough would probably cost him his job.

However, since the latest talks don't involve the possibility of Citigroup receiving additional government capital, it isn't clear whether Mr. Pandit's job is on the line. A Citigroup spokeswoman declined to comment.

Federal officials have been pushing Citigroup executives and the board's lead independent director, Richard Parsons, to shake up the company's 15-member board. Already, three directors, including former Treasury Secretary Robert Rubin, have announced plans to step down this spring.

There are at least two catalysts for the recent talks with the government.

First, Citigroup's shares have fallen to historic lows. That doesn't pose a direct threat to the company's stability. But if it spooks customers into pulling their business, that could push the bank toward a dangerous downward spiral.

Second, bank regulators this week will start performing their battery of stress tests at the nation's largest banks as part of the Obama administration's industry-bailout plan. As part of those tests, the Fed is expected to dwell on the TCE measurement as a gauge of bank health, according to people familiar with the matter.

The crisis is triggering a deep re-examination of the way bank health is measured in the U.S. financial system. This is a complex exercise, but it boils down to calculating various ratios of how much cushion a bank has to absorb losses on loans and other bad assets.

Until recently, TCE has been one of the less prominent ways of gauging a bank's vigor. Bankers and regulators generally prefer to use what is known as "Tier 1" ratio as the measurement.

According to their Tier 1 measurements, most big banks, including Citigroup, appear healthy. By contrast, most banks' TCE ratios indicate severe weakness. Citigroup's TCE ratio, for example, stood at about 1.5% of assets at Dec. 31, well below the 3% level that investors regard as safe.

The regulators' new focus on TCE represents an important shift. The government's recent injections into hundreds of institutions were predicated on the idea that Tier 1 was key. Because the investments weren't in the form of common stock, they didn't affect the companies' TCE ratios.

In Citigroup's case, converting a significant portion of the government's preferred stock into common shares would help lift the company's TCE ratio, perhaps to as high as 4%, according to a person familiar with the company's thinking.

—Dan Fitzpatrick, Deborah Solomon and Damian Paletta contributed to this article.

Write to David Enrich at [e-mail] and Monica Langley at [e-mail]