Having already received $45 billion in US government aid, Citigroup is once again in talks for a further infusion of funds that may give the government as much as a 40 per cent stake in the bank. There are fears that the bank could end up being nationalised, like the American International Group.
Though the deal under discussion might not involve additional costs to taxpayers, it would hammer common stockholders. News reports late last evening said the bank, either voluntarily or at the behest of the government, was converting preferred shares held by the government into common shares, which would dilute the stake of existing stockholders.
Senate banking committee chairman Christopher Dodd had said on 20 February that banks may have to be nationalized for "a short time" to help lenders such as Citigroup and Bank of America survive the worst economic slump in 75 years. The two banks have received a combined $90 billion in federal aid in four months.
Citigroup declined to comment on the reports, except to reiterate a statement made by spokeswoman Shannon Bell last week that Citigroup's capital base is "strong" and Tier 1 capital ratio, a measure of its ability to absorb losses, was 11.9 per cent at the end of the fourth quarter, "among the highest in the industry."
Investors have blamed treasury secretary Timothy Geithner's failure to clarify his intentions regarding Citigroup and Bank of America Corp for hurting the companies' stocks. Citigroup shares have tumbled 71 per cent this year and Bank of America is down 73 per cent, ranking the banks among the 10 worst performers on Standard & Poor's '500 index'.
Citi, reeling from $18 billion in losses for 2008 and massive exposure to the consumer loan market, is already in the process of splitting itself in two. It is segregating more than $800 billion of unwanted assets and businesses, like mortgage lending and consumer finance, in a new business unit with its own management, which will spend its time selling the assets or otherwise disposing of them.
It has sold a majority stake in its prized subsidiary, Smith Barney, a joint venture with Morgan Stanley. The rest of Citi, which is returning to its pre-1998 name Citicorp, will continue with the remaining businesses, including corporate and retail banking, private banking and wholesale services around the world.
Announcing the plans in January, CEO Vikram Pandit had said, "This new structure will provide a wide range of options going forward to continue strengthening our core franchise." However, if government ownership of the bank increases, his own job could be on the line.