BANK SHARES rose on Wall Street yesterday after the Obama administration signalled its willingness to take as much as a 40 per cent ownership stake in Citigroup – but stop short of nationalising the bank.
Citigroup declined to comment on reports that it was in talks with the administration to convert preferred shares held by the federal government into common stock. The federal government injected $45 billion into the struggling bank last autumn and the latest proposal would not involve any further use of taxpayers’ money.
Instead, the government’s preferred shares would be converted into common stock, giving the administration expanded voting rights. The move would mean that other Citigroup shareholders would see the value of their stakes diluted but, unlike under full nationalisation, they would not be wiped out.
“It’s not nationalisation, it’s protecting the taxpayers’ interests,” Senate majority leader Harry Reid told MSNBC yesterday. “I think what we are doing in banking now at a time of distress is the right thing to do and we’re getting very close to stabilising the banking industry.”
In a joint statement yesterday, the US Treasury, the Federal Reserve and other banking regulators said they will apply new “stress tests” to banks, starting tomorrow, to determine if they have sufficient capital.
“The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments,” the statement said.
If banks are determined to have too little capital, they will be encouraged to seek help first in the private sector but, if that fails, the government will make a “temporary capital buffer” available.
“Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalised position and can be retired under improved financial conditions before the conversion becomes mandatory,” yesterday’s statement said.
“Currently, the major US banking institutions have capital in excess of the amounts required to be considered well capitalised. This programme is designed to ensure that these major banking institutions have sufficient capital to perform their critical roll . . .”
