* Government to convert up to $25 bln of preferred shares
* White House says higher U.S. stake will help bank
* CEO says remains in charge, no nationalization
* Shares slide 39 percent
(Adds White House and credit agency comments; closing prices)
By Jonathan Stempel and David Lawder
NEW YORK/WASHINGTON, Feb 27 The U.S. government
will boost its equity stake in Citigroup Inc (C.N) to as much
as 36 percent, bolstering the bank's capital base in the latest
emergency effort to save the banking giant.
In its third attempt to prop up Citigroup in the past five
months, the government will convert up to $25 billion in
preferred shares to common stock. Existing shareholders could
see their ownership of the bank diluted by 74 percent.
While the latest rescue does not inject more money into
Citigroup, it gives the government more of a voting stake and
far greater influence over the bank's operations, short of
outright nationalization. The White House said a higher U.S.
stake will help achieve a "better outcome" for the bank.
"The government is the new boss," said Mike Holland, the
founder of money manager Holland & Co in New York. "Every major
decision is something that is not going to come out of Park
Avenue, but is going to come from Washington, D.C."
New York-based Citigroup in October and November received
$45 billion of taxpayer money, as well as a government backstop
to cap losses on $301 billion of toxic assets.
Shares of Citigroup closed down 39 percent on Friday, and
touched their lowest level in at least 18 years. The market
value of what was once the world's most valuable bank has
fallen to $8.2 billion, Reuters data show, from a peak above
$270 billion roughly two years ago.
U.S. Bancorp's (USB.N) market value is more than three
times greater than Citigroup's, though the regional bank's
asset base is only one-seventh as large.
Moody's Investors Service cut Citigroup debt one notch to
"A3," its fourth-lowest investment grade, saying Citigroup is
likely to shrink, "which could diminish its relative importance
to the U.S. banking system over the long run." Standard &
Poor's affirmed its "A" rating, a notch higher.
(For a graphic on Citi's decline, see:
CEO SAYS STILL IN CHARGE
Friday's agreement calls for Citigroup to offer to exchange
common stock for up to $27.5 billion of its preferred shares at
$3.25 per share. The government will match the exchange up to
$25 billion, provided private investors do the same.
Citigroup will halt dividends on preferred and common
stock, but maintain payouts on trust preferred securities.
The agreement could be a template for other lenders that
have taken government money. It will boost Citigroup's tangible
common equity ratio, a measure of capital, to between 5.4
percent and 8.1 percent from the fourth quarter's 3 percent.
On a conference call, Chief Executive Vikram Pandit said
senior executives "completely remain in charge" of day-to-day
The bank will shake up its board and install a majority of
new, independent directors. Five of the board's 15 members are
either not standing for reelection or will reach retirement age
by the time of Citigroup's annual meeting in April.
"Investors want to see heads roll because they're so angry
at the entire banking industry," said Marshall Front, chairman
of Front Barnett Associates LLC in Chicago, which invests $500
million. "But Citigroup management is as well qualified to deal
with the problems the bank faces now as anyone, and would not
have the learning curve that new people would face."
Citigroup shares closed down 96 cents to $1.50 on the New
York Stock Exchange. Front said the drop was not steeper
because "the stock long ago discounted substantial dilution,
which is now being formally recognized."
Shares of other lenders also fell, including declines of
25.8 percent at Bank of America Corp (BAC.N) and 16 percent at
Wells Fargo & Co (WFC.N).
The Standard & Poor's 500 stock index .SPX fell 2.4
percent after the government said U.S. gross domestic product
fell much more in the fourth quarter than analysts had
Separately, Citigroup said it has recorded more than $8.9
billion of charges to write down goodwill and its Nikko Asset
Management unit in Japan. The charges boost its fourth-quarter
loss to more than $17.2 billion, and Citigroup's full-year loss
to $27.7 billion.
CEO SAYS NO NATIONALIZATION
Citigroup and other large U.S. banks will soon undergo
"stress tests" to assess their ability to cope with a severe
recession, and whether they might need more capital.
Referring to the new rescue, Pandit said, "This capital
should take confidence issues off the table, even in a stressed
environment." Asked about nationalization, he added, "This
announcement should put those concerns to rest."
The Obama administration has said it prefers to keep banks
in private hands, and Federal Reserve Chairman Ben Bernanke
this week rejected 100 percent government control of lenders.
The United States already has a nearly 80 percent stake in
insurer American International Group Inc (AIG.N), while the
British government owns 70 percent of Royal Bank of Scotland
Group Plc (RBS.L). [ID:nHKG137257]
"There is so much going on in terms of trying to manage the
continuing and unfolding drama around the credit crisis," said
Peter Kenny, managing director at Knight Equity Markets in
Jersey City, New Jersey. At Citigroup, he said, the government
"didn't want to have to take any more than it had to."
NO PLANS TO SELL BANAMEX
Pandit has split Citigroup into two: Citicorp, which has
retail banking and other businesses that Citigroup wants to
keep, and Citi Holdings, which includes troubled or
underperforming assets it wants to sell or wind down.
A higher government stake could complicate Citigroup's
ability to operate in some of the more than 100 countries where
it has businesses. Bank executives downplayed speculation that
Citigroup might shed all or part of its ownership of Grupo
Financiero Banamex, Mexico's second-largest bank.
"We're not open to the idea of offloading assets that we
really want to keep," Edward "Ned" Kelly, head of global
banking and Citi Alternative Investments, said in an interview.
"Banamex is a very important property to us, and we are intent
on retaining it and maximizing its value."
He also called the bank's Handlowy business in Poland "an
extraordinarily important franchise to us."
Citigroup said the preferred stock exchange could boost its
common share count as high as 21 billion from 5.5 billion now.
It said investors including Saudi Prince Alwaleed bin Talal,
Singapore Investment Corp, Capital Research and Management and
others had agreed to swap their preferred stock.
(Reporting by Jonathan Stempel and David Lawder)
(Additional reporting by Elinor Comlay, Joseph A. Giannone and
Juan Lagorio in New York; Saeed Azhar and Kevin Lim in
Singapore and Rafael Nam in Hong Kong; writing by John
Stonestreet; editing by Jeffrey Benkoe, John Wallace and Carol