Breaking: Gov't discussing nationalization w/Citi tonight
by bobswern, Sun Feb 22, 2009 at 06:18:42 PM EST
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.
...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..."