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Sunday, February 22, 2009

WSJ: Citi and U.S. Government in Talks to Convert Preferred to Common

by Calculated Risk on 2/22/2009 08:41:00 PM

From the WSJ: U.S. Eyes Large Stake in Citi

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank ... the government could wind up holding as much as 40% of Citigroup's common stock.
Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock ... The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their shares diluted.
Citi's market cap is around $10 billion, so it seems the government is getting a poor deal if the $45 billion in preferred is converted into only 40% of Citi's common stock.

The article also mentions an important shift:
[B]ank regulators this week will start performing their battery of stress tests at the nation's largest banks as part of the Obama administration's industry-bailout plan. As part of those tests, the Fed is expected to dwell on the ["tangible common equity"] TCE measurement as a gauge of bank health ...

... TCE has been one of the less prominent ways of gauging a bank's vigor. Bankers and regulators generally prefer to use what is known as "Tier 1" ratio as the measurement.

According to their Tier 1 measurements, most big banks, including Citigroup, appear healthy. By contrast, most banks' TCE ratios indicate severe weakness. Citigroup's TCE ratio, for example, stood at about 1.5% of assets at Dec. 31, well below the 3% level that investors regard as safe.
UPDATE: Here is another take from the Financial Times: Citi presses officials to take 40% stake