The US government will boost its stake in Citigroup under a deal announced Friday aimed at shoring up confidence in the troubled banking giant.
The government's stake will be raised to 36 percent from the current eight percent under the plan to convert 25 billion dollars of public capital injected in the form of preferred stock in the bank to ordinary shares, officials said.
The conversion does not call for more government funds but helps shore up the capital position of Citi, once the world's biggest financial services firm which has received 45 billion dollars in bailout funds from the government.
The move aims to avoid a feared nationalization of Citi, once the world's biggest financial firms, but analysts said the conversion gives the government effective control as the bank's largest shareholder.
The deal also called for Citi to suspend all dividend payments and revamp its board of directors.
The US Treasury said it moved to convert part of its preferred stock after a request by Citi to participate in a 27.5 billion dollar exchange offer with other preferred holders, including the Singapore government and a Saudi prince.
Citi gave a conversion price of 3.25 per share share, a 32 percent premium over Thursday's closing price of 2.46 dollars.
"Based on the maximum eligible conversion, the US government would own approximately 36 percent of Citi's outstanding common stock and existing shareholders would own approximately 26 percent of the outstanding shares," Citi said in a statement.
The Government of Singapore Investment Corporation (GIC) said Friday its conversion of preferred notes into common stock would give it an 11.1 percent stake in the bank. There was no immediate word from other key shareholders.
Richard Parsons, Citigroup chairman, said the bank's board "unanimously decided to have a majority of new independent directors as soon as feasible."
The Treasury left open the possibility of taking an ever bigger stake.
"Citigroup will be allowed to apply for additional mandatory convertible preferred securities or request conversion of the remaining preferred held by Treasury into these securities, consistent with the terms of the program," a Treasury statement said.
The government move to shore up the capital base of Citigroup comes amid market jitters over the strength of US banks saddled with possibly trillions of dollars of soured home mortgage securities.
The government has persistently rejected rumors that it wanted to nationalize banks although it had already taken effective control of several big enterprises such as insurance giant AIG on the verge of collapse amid the mortgage crisis, which triggered global financial turmoil.
"Assuming substantial conversion takes place, the US government will become by far the largest single shareholder in Citi with a stake in the range of 40 percent," ratings agency Fitch said Friday.
Fitch believed Citi's asset quality "will continue to deteriorate considerably in 2009."
Citi's stock got a battering immediately after trading began Friday, down a sharp 33.3 percent to 1.64 dollars as at 1700 GMT Friday, pulling down other financial stocks as well on concerns other banks could be snared in a similar arrangement where the government will move to take a major stake.
Analysts said they were skeptical about assurances by the Treasury and Citi that the government bid to boost Citi's tangible common equity does not involve any extra taxpayer money.
"What this maneuver does involve is a sobering reminder to private investors that the rules can change to benefit the government's holdings when it is deemed necessary," said Petrick O' Hare of Briefing.com.
"That's the great irony here -- the government says it is doing all it can to fix the system to encourage private investment again in the troubled banks, yet it is acting in a way that is sure to crowd out the very private investment it wants to invite to the bailout party," he said.
