The Government Gets A Bigger Chunk of Citigroup
Friday, February 27, 2009SUSIE GHARIB: Citigroup's biggest shareholder got even more powerful today. American taxpayers now own 36 percent of the struggling financial services giant, after the U.S. government changed the terms of its bailout loans. The deal involved no new money, but the government converted $25 billion of its preferred shares into common stock, a move that wipes out nearly three quarters of existing shareholders' stake. Citi also eliminated its dividend. But the actions failed to boost investor confidence. Shareholders dumped Citi shares, which tumbled 42 percent. Stephanie Dhue has more on the factors behind today's Citi deal.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the past when the Treasury injected capital into Citigroup, the government set the price. But by converting preferred shares to common shares today, it used the market to set the price. Attorney Micah Green says doing that may set a new standard.
MICAH GREEN, PARTNER, PATTON BOGGS: They basically said, the Treasury will not pay any more than the best price gotten by a private investor who is putting capital in as part of this transaction.
DHUE: Green says the Citi action underscores the government's commitment to the nation's largest banks.
GREEN: Right now it's not just about a single institution and whether or not it's technically too big to fail, it's also about confidence in the system.
DHUE: The government may have little choice but to keep large banks up and running. The FDIC, the agency that insures bank deposits and regularly takes over smaller banks, doesn't have authority over a massive bank holding company like Citi. It also doesn't have the money. The FDIC has just $20 billion of its own reserves to insure deposits. There's also an issue of human resources. Former FDIC Chairman Bill Isaac says it would be a logistical nightmare that the agency is ill-equipped to handle. There's also no buyer big enough to purchase an institution like Citi once the balance sheet has been cleaned up. FDIC Chairman Sheila Bair says helping finance large banks is the right choice for the economy.
SHEILA BAIR, CHAIRMAN, FDIC: It's the one that's designed to keep these institutions viable and lending into the economy. That's really the only justification providing government support.
DHUE: Institutional Risk Analytics Co-Founder Chris Whalen says bank bond holders also pose a challenge to the Treasury.
CHRIS WHALEN, INSTITUTIONAL RISK ANALYTICS: These are the same people who buy U.S. Treasury bonds, if we cause them to take a loss on Citi, they may not show up for the next Treasury auction and then we all have a problem.
DHUE: Still, Whalen thinks the taxpayers and Congress will tire of supporting Citi and the government will move to completely take over the firm. That's a move the administration said again today it opposes. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
