Taxpayers Could Own Up to 40% of Citi’s Common Stock, Diluting Value of Shares
February 23rd, 2009But before you read about that, here’s the setup: Would CNBC Let Gasparino Say This On-Air?
Earlier this year, high-flying hedge fund Paulson & Co. retained [former Federal Reserve chief Alan Greenspan] for its “advisory board.” The firm is a noted “short seller” of banks and financial stocks – meaning it makes money when these companies’ shares fall.
The thing is, Greenspan is making public comments that inevitably influence public policy and the markets – and some of those comments may well have led to his clients making a nice profit.
In a recent speech to the Economic Club of New York, Greenspan said the recession would likely “be the longest and deepest” since the Great Depression and that Congress might have to allocate more money to save the beleaguered banking system on top of the billions already gone for the Troubled Asset Recovery Program.
Then he told the Financial Times: “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring” of their troubled balance sheets.
Such a move would wipe out stockholders, sending shares of banks even lower – thus likely benefiting Paulson. It would also protect bondholders, helping another Greenspan client, the large bond-firm Pimco.
Via: Wall Street Journal:
Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.
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.
When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions. The potential move at Citigroup would give the government its biggest ownership of a financial-services company since the September bailout of insurer American International Group Inc., which left taxpayers with an 80% stake.
The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup’s share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.
Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.
The move wouldn’t cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.
Bank of America Corp. said Sunday that it isn’t discussing a larger ownership stake for the government. “There are no talks right now over that issue,” said Bank of America spokesman Robert Stickler. “We see no reason to do that. We believe the goal of public policy should be to attract private capital into the bank, not to discourage it.”
Shareholders’ Fears
Citigroup’s low share price already reflects, at least in part, a fear among shareholders that their stakes might be further diluted. A government move to take a big stake could backfire, potentially spurring investors to flee other banks, even healthier ones.
Research Credit: ltcolonelnemo
