Citigroup Inc. announced that it has reached a deal with the federal government that will give the government up to a 36% stake in the bank. The government currently owns preferred stock in Citigroup which it will convert into common shares.
Citigroup: Post-Preferred Stock Conversion
Citigroup and the government have reached yet another deal in an effort to save the sinking bank.
Baseline Scenario has a very good explanation of the basic math behind the transaction. Basically, the federal government, along with other private investors, will convert some of their preferred stock in Citigroup into common shares. The private shareholders can exchange up to $27.5 billion of their existing preferred stock at a conversion price of $3.25 per share. That’s a far higher price per share than the current market price, which is currently under $2.00 per share
The government will convert $25 billion of preferred stock it currently owns at the same price as the private investors: $3.25 per share. The government received the Citigroup preferred stock when it helped refinance Citigroup in October during the government bailout of the financial sector.
If all of the preferred stock is converted as currently planned, the current common stockholders will own only about 26% of Citigroup. According to Crains New York, the transaction could result in the government owning up to 36% percent of Citigroup. The preferred stock owned by the government prior to the conversion accounted for about 8% of Citigroup.
According to the government, the transaction will provide Citigroup with additional capital that will help it during the weak economy. Basically, this is an accounting move, with the high conversion price allowing Citigroup to have a higher capitalization than it currently has. The transaction will also change the makeup of Citigroup’s board of directors, so that it will have more independent directors.
Citigroup has already received $45 billion in government aid. The conversion will not result in the use of more government funds. However, with the government owning 36% of the bank, this is yet another step towards nationalization. Citigroup shares tanked today in response to this announcement. Most stock market indexes also declined.
See Video on the Conversion of Preferred Stock below:
Citigroup Preferred Stock Video
February 27th, 2009 at 5:19 pm
Where is the deposit window? I have a mattress full of Confederate money I’d like to have the bank hold.
February 28th, 2009 at 1:20 pm
its disappointing to see these bank ceo’s, even now, go on and on about how they are going to do just fine and then the next shoe drops over and over again. why don’t they just write off their losses and put out a real balance sheet? And if the gov wants to help so much why not just have them sell thier toxic stuff to a toxic gov bank that will steward it the next decade through the recovery? I listened to Pandit and now realize nothing he said was meaningful or helpful in getting an idea of the scope of the problems they face, yet he acted so in charge of the problem. luckily I didn’t buy the stock. I am beginning to think money simply just runs the game and leadership has little impact on its success. Analagous to US foreign policy, often terrible, cept we have a huge miliatary that protects us from our mistakes. Did anything bush or clinton do with north korea really bear any real fruit except give us press headlines to get our hopes up for years while accomplishing nothing real and now we are back to square one?