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.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 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.Details of the rescue remain in flux. Key questions, such as the price at which the government will convert its preferred stock into common shares, haven't been resolved.And it's possible that other options will emerge to stabilize the company. For example, the Obama administration could decide to sit tight until the results of several new "stress tests" on major banks-broad examinations of financial health now being mandated-are known in a couple months, one official said.If the deal gets nailed down, it will be Washington's third effort to aid Citigroup since last fall. In October, the Treasury Department put a total of $125 billion into eight giant financial institutions, including $25 billion to Citigroup, in exchange for preferred shares and warrants to buy stock.Then, shortly before Thanksgiving, the government agreed to infuse another $20 billion into Citigroup as its stock tumbled. It also agreed to protect the banking company against most losses on a $301 billion pool of assets.Among the question marks looming over the current discussions is the future of Citigroup Chief Executive Vikram Pandit and the company's board...
By DAVID ENRICH and MONICA LANGLEY
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As in the days of Noah...