Citigroup is in talks to give the US government a larger stake, a person familiar with the matter said, which could provide the government with a far greater say in the affairs of the ailing banking giant.
If the government took a large common equity stake, even if it lacked voting control, the move could be the equivalent of a nationalization. Citigroup shares fell below $2 on Friday as investors feared that soaring losses would result in nationalization, wiping out shareholder equity.
Taxpayers could end up owning as much as 40 percent of New York-based Citigroup's common stock, though executives at the third-largest US bank by assets hope to limit the stake to about 25 per cent, The Wall Street Journal said today, citing people familiar with the situation.
Talks could lead to the government converting a substantial portion of its $45 billion in Citigroup preferred shares, equal to a 7.8 per cent stake, into common stock, diluting existing shareholders, the newspaper said.
The Obama administration has not indicated whether it supports the plan, though the White House has said President Obama favours a privately-held banking system.
“It can be taken as a commitment that some banks are too big to fail and the economic consequences too bad to contemplate,” said Tony Morriss, senior markets strategist at ANZ Investment Bank, in Sydney.
A larger government stake, however, could fuel speculation that Bank of America Corp and other lenders might need similar agreements. If that happened, shares of other lenders could fall, including relatively healthy ones.
“Nationalization is a trap that the US government should avoid," Fox-Pitt Kelton analyst David Trone wrote. “If Citi is nationalized, all bank stocks are likely to get crushed in fear."
In premarket trading, Citigroup shares rose 9.2 per cent to $2.13, while Bank of America rose 10.8 per cent to $4.20. JPMorgan Chase & Co rose 5.3 per cent to $20.95, and Wells Fargo & Co rose 8 per cent to $11.78.
US stock futures rose 1 per cent, and US Treasury prices fell.
Vikram Pandit, Citigroup's chief executive, has tried to stabilize the bank by dividing it in two, creating Citicorp to house healthier businesses the bank wants to keep, and Citi Holdings to house businesses it hopes to sell or wind down.
The Citigroup news came as governments worldwide move to prop up ailing banks, and after European Union leaders backed a doubling of funds for the International Monetary Fund to aid bailouts of banking and other industries.
Citigroup in October and November issued $52 billion of preferred shares to the government, of which $45 billion was considered capital and $7 billion a fee for the US agreeing to share losses on $301 billion of troubled assets.
Reuters