U.S. to Take Big Citi Stake and Overhaul the Board

Main points:

We didn't put in any more taxpayer dollars (not yet anyway).
The deal addresses the issue of the Board of Directors. The Board will be constructed of new, independent members. I wonder why this took so long?
Chief Executive Vikram Pandit keeps his job.
If full dilution occurs we the taxpayers end up owning 36 percent of the bank. We are way underwater.
The deal boost the bank's tangible common equity ratio. Makes the bank look good for now.

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U.S. to Take Big Citi Stake and Overhaul the Board

U.S. to Take Big Citi Stake and Overhaul the Board

By KEVIN KINGSBURY and MAYA JACKSON RANDALL

Struggling banking giant Citigroup Inc., moving aggressively to shore up its equity base, announced a stock swap Friday that if successful will leave the government owning more than a third of the company and wipe out nearly three-quarters of existing shareholders' stake.

The move is an acknowledgment that more than $50 billion in government capital and a backstop on more than $300 billion in troubled Citigroup assets haven't been enough to stop the bank's slide. It also represents a deepening of the government's role in trying to prop up the U.S. banking sector.

Under the deal, Citigroup said it will offer to convert nearly $27.5 billion in preferred stock sold to private investors and the public and up to $25 billion in preferred stock bought by the government into common stock. The exchange, if fully executed, would leave the U.S. government with 36% of the bank's shares. Existing shareholders' stake would be cut to 26%. Shareholders will have to approve much of the common stock issuance.

Additionally, the government is demanding that the company overhaul its board of directors. Citigroup's board will soon include a majority of new independent directors, the company said Friday. Chief Executive Vikram Pandit is expected to keep his job under the agreement.

The bank's stock plunged on the news.

The terms are onerous for both sides. While common shareholders will see their stakes severely diminished, preferred shareholders are being asked to swap their holdings for riskier common stock, whose holders are the first to get wiped out in times of trouble.

Neither has much choice, however. To motivate investors to sign up, Citigroup is suspending its payment of dividends on preferred stock. And to spur common shareholders to vote for the deal, Citigroup will issue securities to preferred shareholders that agree to the swap that let them buy common stock for a penny a share if shareholders don't approve the deal.

The swap won't involve any additional investment in Citigroup by either the government or the private shareholders, but will boost the bank's tangible common equity ratio, which is closely watched by analysts. It will also relieve the bank of the need to pay more than $5 billion in annual preferred stock dividends.

"This securities exchange has one goal -- to increase our tangible common equity," Chief Executive Vikram Pandit said.
[Citigroup Center in New York] Bloomberg News/Landov

A pedestrian walks past the Citigroup Center in New York.

Separately, Citigroup announced it will record $10 billion in write-downs for the fourth quarter, boosting the year's net loss to $27.7 billion. Citi is also suspending dividend payments on common shares, which had already been slashed to 1 cent a share per quarter.

The conversion rate for swapping the preferred stock to common shares is $3.25, a 32% premium to Thursday's closing price.

The Treasury will only convert its preferred stock into common shares if other preferred-stock holders -- namely sovereign wealth funds that plowed billions into Citigroup in early attempts to bolster capital levels -- also do so. Holders including the Government of Singapore Investment Corp. and longtime shareholder and Saudi Prince Alwaleed Bin Talal are among those of have said they will participate in the exchange.

Treasury said it will match private investors' conversions dollar-for-dollar.

"Treasury will receive the most favorable terms and price offered to any other preferred holder through this exchange," the department added in the statement.

If the maximum conversion levels are hit, that would boost Citi's TCE from the fourth quarter's $29.7 billion to as much as $81 billion.

The agreement marks the third time since October that Washington has come to Citigroup's rescue. Since then, the government has pressured Citigroup to partially break itself up by selling big chunks of its businesses and to overhaul its board. But U.S. ownership has also created a murky situation in which it's unclear who's in charge, leaving Citigroup executives often groping for guidance.

Citigroup will still have to endure the so-called "stress test," which examines banks ability to withstand various chilling economic scenarios, and could be required to raise additional capital.

The company will reconstitute its board to include a majority of new independent directors. It said of the 15 current directors, three will not stand for reelection and two will reach retirement age, and it will announce new directors soon.

Citigroup Chairman Richard Parsons has been scrambling to lure new directors. That has proven an uphill battle, with two candidates Citigroup approached rebuffing the overtures, according to people familiar with the matter.
—Deborah Solomon and David Enrich contributed to this article.

Write to Kevin Kingsbury at kevin.kingsbury@dowjones.com and Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com

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Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , managed on Wall Street at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, BlogCritics, and a growing list of newspaper websites (15). Bob is actively seeking writing assignments and syndication.