Breaking: Gov't discussing nationalization w/Citi tonight


It's being heavily reported late this evening in the online edition of the Wall Street Journal that, "U.S. Eyes Large Stake in Citi."


U.S. Eyes Large Stake in Citi
Taxpayers Could Own Up to 40% of Bank's Common Stock, Diluting Value of Shares
By DAVID ENRICH and MONICA LANGLEY

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.


While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world's largest financial institutions. Citigroup has proposed the plan to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks.

So, it's not a done deal, but there's this interesting statement (see my emphasis in bold, below) in the article which indicates this is all occurring due to the folks at Citi--not the U.S. government--initiating this most recent discussion:


...The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup's share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.

--SNIP--
...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...

IMHO, this still could move a lot of different ways, with many options not being that great for taxpayers. For starters, while the spin on this is that 'it won't cost taxpayers a dime more than we've already spent,' the reality is there are massive backstops and related guarantees in place which haven't been exercised as of this writing.

In any event, there's no reason to get excited about any of this, regardless of the outcome. But, it all very much dovetails with Frank Rich's piece in today's New York Times, "What We Don't Know Will Hurt Us," where the reality is that external pressures--as opposed to governmental decisions ahead of the curve--will dictate what the government does or does not do when it comes to nationalizing certain banks here in the U.S., as well as a myriad of other moves the Fed's will make in coming weeks and months, as the economy slides deeper into the abyss.

In the most critical sense of the phrase, this story is: "To be continued..."

Tags: banking industry, banks, Citigroup, depression, recesssion, U.S. government, Vikram Pandit (all tags)

Comments

10 Comments

Tips: Because it's time to get on with it! n/t

by bobswern 2009-02-22 06:21PM | 0 recs
Too slow

they need to make a decision and stick with it.  On Friday the Administration was trying to shoot down the notion of nationalization with respect to Citi and BofA.  In response the market recovered.

The simple reality is they need to force a resolution of this quickly.  From a technical perspective this is a stock market that is looking like 4 or 5 thousand is a real possibility.  The welath effect of another 20-30 percent decline the stock market would be a disaster.

With each passing day it appears that this recession is on its way to becoming a depression.

by fladem 2009-02-22 07:03PM | 0 recs
It already is a Depression! n/t

by bobswern 2009-02-22 07:35PM | 0 recs
Re: Too slow

I'm actually counting on the Dow reaching 5000.  It's my buy point.  Until then, I sit on my cash.

by SuperCameron 2009-02-23 08:15AM | 0 recs
OK to firmly say the opposite before pulling

nationalization as a surprise. That's best for the economy and stockmarket. Bankruptcy and temporary nationalization have been the way to go for awhile, and the Obama admin should've been planning for it meticulously over the last two weeks. But during those two weeks it should've said it wasn't being contemplated.

by fairleft 2009-02-23 10:57AM | 0 recs
Re: Breaking: Gov't discussing nationalization

Who do you suppose is talking to the papers about this, and whom does it benefit?

by Steve M 2009-02-22 07:39PM | 0 recs
Citi initiated these talks, not gov't.

If you're on the Board of Citi, and given a choice between seeing your stock below $2 a share, or getting a quarter or a half-trillion more in fed'l funds to maintain at least some value for your stockholders, the your obligation as a board member to your stockholders is do what's necessary to keep the company afloat.

That being said, getting a half-trillion (give or take a hundred billion) dollars in equity when your books are cooked and you're insolvent is one hell of a magic act...but, apparently, that's what Citi's trying to accomplish now.

Truth be told, the gov't has every legal right to just step in and put the bank into receivership...which is what the government should do right now, rather than pissing away all of this extra money for no sane reason.

That's my two cents, fwiw.

by bobswern 2009-02-22 07:53PM | 0 recs
Re: Citi initiated these talks, not gov't.

I meant, though, who is leaking the discussions to the press.

by Steve M 2009-02-23 03:07AM | 0 recs
Someone concerned with tanking...

...financial stocks and their adverse effect upon "the public discussion," which narrows it down to just about everyone, except for the shortsellers, as those having reasons to leak this to the press now. (Citi, the gov't, any p.r. firm personnel privy to what's going on, etc., etc.)

It appears the gov't is doing everything it can to cauterize this, up to avoiding using the "N-word" at all costs. And the media just sucks it right up.

So, again, it could be a leak (or multiple leaks) from one of many different sources.

by bobswern 2009-02-23 05:09AM | 0 recs
About time...

by Ravi Verma 2009-02-22 07:54PM | 0 recs

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