NEW YORK/WASHINGTON - The US government will boost its equity stake in Citigroup Inc to as much as 36 percent, bolstering the bank's capital base in the latest emergency effort to prop up the ailing banking giant.
The bailout bid is the third for Citigroup in the past five months, and will dramatically dilute existing stockholders stakes to as low as 26 percent. The government will convert up to $25 billion in preferred shares for common stock.
While the package does not immediately inject more money into Citigroup, it gives Chief Executive Vikram Pandit more time to shrink the third largest US bank, sell unwanted assets and restore investor confidence.
It also give the government far greater influence on Citigroup's operations, short of an outright nationalization. Citigroup also agreed to shake up its board, and install a majority of new independent directors.
"The government is the new boss," said Mike Holland, the founder of money manager Holland & Co in New York. "Every major decision is something that is not going to come out of Park Avenue, but is going to come from Washington D.C."
The agreement on Friday will boost Citigroup's tangible common equity ratio, a measure of capital, to between 5.4 percent and 8.1 percent from 3 percent in the fourth quarter. It could also be a template for other banks that have taken government money and find their businesses under pressure.
Citigroup shares were down 72 cents at $1.74. Shares of other lenders also fell, including declines of 13 percent at Bank of America Corp and 6 percent at Wells Fargo & Co.
The Standard & Poor's 500 stock index was down 1.7 percent, after the government said U.S. gross domestic product fell at an annualized 6.2 percent in the fourth quarter, a much steeper drop than analysts expected.
CEO says No to nationalization
On a conference call, Pandit said senior executives "completely remain in charge" of day-to-day operations for now.
Citigroup and other large US banks will soon undergo "stress tests" to assess their ability to cope with a severe recession, and whether they might need more capital.
"This capital should take confidence issues off the table, even in a stressed environment," Pandit said on the call.
Asked about nationalization, he added: "This announcement should put those concerns to rest."
Pandit has split Citigroup into two: Citicorp, which has retail banking and other businesses it wants to keep, and Citi Holdings, which includes troubled or underperforming assets it wants to sell or wind down.
He downplayed speculation that Citigroup might shed all or part of its ownership of Grupo Financiero Banamex, Mexico's second-largest bank.
The Obama administration has expressed its preference to keep banks in private hands, and Federal Reserve Chairman Ben Bernanke this week rejected the idea of 100 percent government control of lenders.
The United States already has a nearly 80 percent stake in insurer American International Group Inc, while the British government owns more than two-thirds of Royal Bank of Scotland Group PLC.
Separately, Citigroup said Friday it recorded more than $8.9 billion of charges in the most recent quarter to write down goodwill and its Nikko Asset Management business in Japan.
The charges boost the fourth-quarter loss to more than $17.2 billion, and Citigroup's full-year loss to $27.7 billion, or $5.59 per share.
Some shareholders will swap
In its agreement with the government, Citigroup will offer to exchange common stock for up to $27.5 billion of its preferred shares at $3.25 per share.
The government will then match the exchange up to $25 billion, provided that private investors do the same. Citigroup will stop paying dividends on its preferred and common stock.
Citigroup said the exchange could boost its share count to as many as 21 billion shares from 5.5 billion now. It said investors including Saudi Prince Alwaleed bin Talal, Singapore Investment Corp, Capital Research and Management and other investors have agreed to swap their preferred stock.
Prior to this week, Citigroup had gotten $45 billion of capital from the government since October as well as a backstop to limit losses on $301 billion of toxic assets.
"There seems to be at least a change in what the government says one time and what it might say at a later time," said Gary Townsend, chief executive of Hill-Townsend Capital in Chevy Chase, Maryland. "This is a brave new world."
The latest agreement followed more than a week of talks between the Treasury Department and Citigroup, which once had a market value about $270 billion. At its low on Friday, that market value was below $10 billion.