Citigroup Inc. is in talks that could see the U.S. government take a bigger stake in the beleaguered bank, according to reports.
The Wall Street Journal said taxpayers could own as much as 40 percent of the ailing lender’s common stock. Citing sources familiar with the talks, the newspaper also said Citigroup executives hope discussions with U.S. officials will result in a government stake closer to 25 percent. The administration of President Barack Obama has not indicated whether it supports the plan, the report said.
A source familiar with the Citigroup situation told Reuters that talks were ongoing between the bank and regulators that could increase the government’s stake. The New York Times described the talks between Citigroup and U.S. regulators as “active.”
Separately, U.S. banking regulators said Monday they stand ready to provide more capital to banks and keep large institutions viable through a new capital assessment program to be launched on Wednesday.
The U.S. Treasury is expected to subject up to 25 banks, each with assets exceeding $100 billion, to “stress tests” to decide which need additional capital.
“The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses,” the regulators said in a statement issued by the U.S. Treasury that named no individual banks.
“The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth,” the regulators said. “Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.”
On Sunday, CNBC reported that officials would not rule out increased or even outright government ownership of large banks at the end of the process, but they say their intent is to avoid that outcome and that it is anything but certain. They old CNBC the government does not want to be running these companies.
If the banks end up in government hands, officials said, the intent would be to get them into private hands quickly and do so in a way that is not much different from how the Federal Deposit Insurance Corp. currently resolves bank insolvencies, which typically take place over the weekend. The extent of government ownership, these officials said, will depend on the size of the losses at the banks, the access of banks to private capital and how the recession plays out.
“I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it,” one high-level official told CNBC.
New details on the so-called bank stress test could be made available as soon as tomorrow, officials say. This process will gauge bank capital levels under worst-case economic scenarios than are currently seen. Details on those scenarios are likely to be made public on Wednesday.
Citi could be a model
Citigroup is discussing with U.S. officials a scenario under which a substantial portion of the $45 billion in preferred shares held by the U.S. government, amounting to a 7.8 percent stake in Citigroup, would convert into common stock, the Times and the Journal reported.
The plan would not cost further taxpayer money, but other Citigroup shareholders would see their stakes diluted and the government would have much larger influence over Citigroup.
The New York Times reported the plan being contemplated at Citigroup could pave the way for similar moves at other big banks.
Separately, the Financial Times said Citigroup was pressing the U.S. government to agree on a new capital injection that would increase the authorities' stake in the bank to about 40 percent, but stop short of outright nationalization.
“It’s a sign of relief that the move at least removes some of the uncertainty around the banking sector," said Tony Morriss, senior markets strategist at ANZ Investment Bank, in Sydney.
"They are certainly moving much faster this time and it can be taken as a commitment that some banks are too big to fail and the economic consequences too bad to contemplate."
The Citigroup news came as other governments around the world moved to prop up their ailing banks, and after European Union leaders backed a doubling of funds for the International Monetary Fund to help with bailouts for banking and other industries...
On Friday, Citigroup shares closed down 22 percent in New York, while Bank of America stock fell 31 percent, falling for a sixth straight session amid fears the government could nationalize the two banks, wiping out shareholders' investments.
Citigroup in October and November issued a total of $52 billion of preferred shares to the government, $45 billion of which was considered capital and $7 billion was considered a fee for the U.S. agreeing to insure a portfolio of Citigroup assets.
The government in those deals also received warrants to buy 7.8 percent of the bank's shares.
The source who spoke to Reuters also said one possibility could be the conversion of preferred stock to common shares, but stressed there were many other possibilities.
The discussions reflect growing concerns that Citigroup and other big U.S. banks could be swamped by losses amid the housing crisis and swooning economy, the Journal said.
The U.S. Treasury declined to comment on the reports, but said it was open to converting preferred shares into common equity to strengthen banks.
Spokesman Isaac Baker said that, under Treasury Secretary Timothy Geithner's bank stabilization plan, institutions can apply to convert preferred shares into convertible preferred shares and later into common equity as needed to strengthen their capital structure.
“We are open to considering a request to do so if the institution and its regulator believe it would promote the long term stability of that institution, and if we believe it's in the best interest of long term stability of our economy and financial system,” Baker said in a statement.
The White House later said President Obama favors a privately held banking system.
Citigroup declined comment on the reports, but said in an emailed statement: “Citi's capital base is very strong and our Tier-1 capital ratio as measured at the end of the fourth quarter was 11.9 percent, among the highest in the industry.
“We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth.”
Citigroup officials hope to persuade private investors that have bought preferred shares — including the Government of Singapore Investment Corp (GIC), Abu Dhabi Investment Authority and Kuwait Investment Authority — to also convert their preferred shares into common stock, the Journal reported.
Singapore's GIC declined to comment.
"Until most of the news is known, there will be a lot of volatility and probably a downward trend in the equity market because we don't know how much pain for investors government measures will induce," said Dariusz Kowalczyk, chief investment strategist with SJS Markets in Hong Kong.
"By which I mean, will current holders of bank equity lose everything, or most?"
The Financial Times said Citigroup insiders expect a decision on the company's future in the coming weeks, but warned it would have to come earlier if its shares fell again this week.
Citigroup could also try to raise fresh equity with a public share offering, the FT said. The aim would be to keep the government stake to no more than 40 percent, or at least below 50 percent, it said, citing people familiar with the plan.
Citigroup stock has dropped 71 percent so far in 2009.
