Fallout: The Financial Crisis

U.S. may take a large stake in Citigroup

Jeremy Hobson Feb 26, 2009
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Fallout: The Financial Crisis

U.S. may take a large stake in Citigroup

Jeremy Hobson Feb 26, 2009
HTML EMBED:
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TEXT OF STORY

KAI RYSSDAL: One more budget note before we move on. A nod back to the president’s speech to Congress Tuesday night. That part where he said he’s going to cut the deficit in half by the end of his first term. Take his figure today of $1.75 trillion budget hole this year, cut that in half, and it’s still a really big number.

There’s probably going to be a deal between Citigroup and the government any day now. If the guesses are right it’d going to involve increasing taxpayers’ stake in the bank to around 40 percent. Whether that’s nationalization or not is a topic for another day. The question at hand right now is how the deal would work. Cause the government’s already got $45 billion bet on Citi’s survival.

Marketplace’s Jeremy Hobson reports from New York.


JEREMY HOBSON: When Washington stepped in with billions for Citigroup, it took convertible preferred shares in return. Now, unlike common shareholders, the government’s stake doesn’t give it voting rights at the bank. But, says Sanford Bernstein analyst Brad Hintz, preferred shareholders get priority when it comes to dividends and liquidation.

BRAD HINTZ: So it’s sort of halfway between a bond, where they’re gonna pay you off at the end, and halfway between a stock. You don’t get quite the return of a stock, but you get a somewhat higher return than a bond.

It was less risky for the government to take preferred shares — and not having voting rights was seen as a good thing. Here’s the problem: Hintz says investors used to count preferred shares just as they counted common shares.

HINTZ: So when they talk about the leverage ratio of a company — in other words, how much capital it has relative to the assets that it has — they’d include preferred.

But, he says:

HINTZ: The market has now become so skeptical that they’re saying the only thing that we’ll count is common.

To convert to common stock, the government would pay around $2.50 a share. That’s about 10 percent of what the stock was worth just five months ago.

Morningstar analyst Jamie Peters says, if nothing else, it would be a major confidence boost. You know, the government hanging out down in the trenches with common investors.

JAMIE PETERS: Basically, shareholders are worried that this company is so levered that additional losses could basically wipe out common shareholders. So if you bring the government in with a new common-share stake, there is now a bigger cushion before common shareholders would be wiped out.

Of course, it would also put taxpayers at greater risk of being wiped out. Unless, that is, the government keeps pumping money in.

In New York, I’m Jeremy Hobson for Marketplace.

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