By Jason Simpkins
Managing Editor
Money Morning
Federal officials are discussing the possibility of converting the U.S. government’s preferred shares of Citigroup Inc. (C) to common stock in a move that would boost taxpayers’ stake in the company to 40%, The Wall Street Journal reported.
The government currently owns $45 billion in preferred Citi shares, or a 7.8% stake of the company. By converting those shares into common stock, the government would increase its stake to 40% at the expense of current shareholders, whose stock would be diluted. The move would be at no additional cost to taxpayers.
Citigroup officials would prefer the government stake be closer to 25% according to The Journal.
By converting the preferred shares into common stock, Citi would bolster its “tangible common equity,” or TCE. The TCE is a measure of what shareholders would receive if an institution were liquidated. It is expected to be one of the key components of the new financial stress tests being administered by federal regulators.
Those stress tests are scheduled to begin this week and will determine how much – if any – additional money that large financial institutions receive from the government. This additional step is being taken to address a gap in how the U.S. government – under the original Troubled Assets Relief Program (TARP) – was previously analyzing the health of big banks and other financial institutions, before injecting taxpayer-provided capital. With the stress tests, the Obama administration is aiming to have a better handle on the health of these institutions, and to lessen the odds that additional rounds of rescue money would have to be brought to bear.
Indeed, under this new plan, if the current financial situation deteriorates, the government may resort to take a majority stake in the most troubled lenders. This has raised the specter of bank nationalization, something that has been hotly debated among the country’s leading financial analysts.
The government has already taken controlling interests in insurance giant American International Group Inc. (AIG), and mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), and now analysts are starting to believe that many financial institutions – Citigroup in particular – are technically insolvent and will ultimately have to be taken over by the government no matter what happens.
“History has shown that those shareholders will likely be wiped out anyway,” Michael Parness, chief executive officer of TrendFund.com, told Cherry Creek News. “Look at Bear Sterns, AIG, Freddie and Fannie Mac. The Fed is trying to be all things to all people and support the system while propping up the stock market.”
Meanwhile, critics have said that nationalization will undermine the entire private financial sector and could cause investors to panic and abandon shares of healthy institutions.
For now, the federal government has given every indication that it will continue to balk at outright nationalization, choosing instead to provide a “temporary” buffer for firms against increased losses during the crisis.
“There’s a very strong commitment on the part of the administration to try to return banks or keep banks private or return them to private hands as quickly as possible,” U.S. Federal Reserve Chairman Ben S. Bernanke said last week.
White House spokesman Robert Gibbs echoed that sentiment at recent press conference.
“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring they are regulated sufficiently by this government,” Gibbs said. “That’s been our belief for quite some time and we continue to have that.”
News and Related Story Links:
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Wall Street Journal:
U.S. Eyes Large Stake in Citi
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Wikipedia:
Nationalization.
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Cherry Creek News:
Nationalize the Banks NOW!
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Acronymfinder.com:
Tangible Common Equity.
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Wikipedia:
Troubled Assets Relief Program.
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These banks in essence have already failed and require federal intervention to keep them afloat. The FDIC only has $44 billion dollars in its arsenal to save the banking system and FDIC already has a $22 billion dollar exposure from previous bank failures (see details: http://wethepeopleoftheunitedstatesofamerica.com/cost_of_banking_failure.html) The FDIC in restructures and sells the assets of these financial intuitions while absorbing all of the losses. The federal government bailing out the larger banks in essence is doing what the FDIC can’t handle. The Federal Government bailing out the banks and becoming a share holder is a better deal that just handing over assets and absorbing a loss. There is going to be a time in the future where these federally bald out banks will be turning a profit, increase in share value and the federal government will be able to sell its stake at a profit thus returning the federally subsidized tax payers money back to the tax payers.
[...] simply need to stop juggling the pieces separately and embrace a total solution. If the government is going to nationalize some banks, which it says it doesn’t want to do, or if it is going to buy troubled assets, which it says [...]
[...] the government will convert its preferred AIG shares, which pay a 10% dividend, into common stock, something U.S. officials are reportedly discussing with Citigroup Inc. [...]
[...] The government may become Citi’s largest shareholder as soon as next month when the bank converts as much as $52 billion in preferred stock into common shares. [...]