WSJ Widens Lead On Citi

The Journal breaks the news that the erstwhile subprime leader is asking the government for more help with an idea of converting a big chunk of its current $45 billion stake from preferred to common stock:

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup’s common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world’s largest financial institutions. Citigroup has proposed the plan to its regulators. The Obama administration hasn’t indicated if it supports the plan, according to people with knowledge of the talks.

The Washington Post gamely matches the scoop, albeit with fewer details.

Right now, the preferred stake is worth 7.8%, which doesn’t include more than $300 billion in government guarantees for toxic assets. Many things are not clear as of yet, including how much the proposed move would increase government’s control over the day-to-day management of the bank or whether this would be good or bad for CEO Vikram Pandit’s career. Indeed, it’s not clear how much control the government is exerting now, but clearly Treasury officials had a hand in decisions to push out Citi’s already-forgotten chairman, Sir Win Bischoff, and dismantle its financial supermarket model last month, the subjects of previous Journal scoops.

All this begs the question of when is a bank effectively nationalized and how will we know when it is? Says the Journal:

There’s no universal agreement on what constitutes nationalization of a bank. In the U.K., the government already owns 43% of Lloyds Banking Group PLC, and last week moved to increase its ownership of Royal Bank of Scotland Group PLC to 70% from 58%. Those two banks have been classified as “public-sector entities,” and as much as £1.5 trillion ($2.136 trillion) of their liabilities have been moved over to the country’s balance sheet.

The White House has knocked down recent speculation that the government is preparing to nationalize several large U.S. banks.

The U.S.’s intentions with Citigroup remain unclear. For instance, it’s not yet known whether the government would seek a stronger hand in the New York company’s management or day-to-day operations.

As the Post points out, the Citi plan would allow it to stop paying the government a hefty dividend on the preferred shares. The Journal also explains that Citi would gain an important accounting benefit:

As part of the plan, Citigroup officials hope to persuade private investors that have bought preferred shares — such as the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority — to follow the government’s lead in converting some of those stakes into common stock, according to people familiar with the matter. That would further bolster an obscure but increasingly pivotal measure of banks’ capital known as “tangible common equity,” or TCE.

The TCE measurement, one of several gauges of a bank’s financial strength, gives weight to common shares — thus the interest in converting preferred shares to common stock.

Citi officials are clearly floating this idea to see if government bites on a plan for semi-limited-quasi nationalization, rather than the real thing. Whether this incremental approach is the way to go I will leave to wiser heads. But if I had to guess, I’d say no.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.