The treasury may convert its stake in Citi from preferred to common equity. Converting to common is a significant step on the way to nationalization because it means Citi’s shareholders would see their ownership stake significantly diluted. Why is the stock up on the news that shareholders are getting diluted? Because the only shareholders left are betting on the long shot: maybe the Obama administration will bail them out. This latest move inches the administration closer to nationalization, but suggests they’re still hesitant to pull the trigger. Maybe, just maybe, it will use taxpayer cash to absorb toxic assets. And then shareholders would make a killing.
More interesting to me is the section of the article regarding the Fed’s new focus on tangible common equity. As regular readers of OptionARMageddon are aware, we’ve been focused on this metric for some time. We even got into a long distance argument (viaFT Alphaville) with high-profile bank analyst Dick Bove about the significance of the measure. Good to see that the government is finally focusing on the right number.
The WSJ article mentions Citi’s tangible common equity of 1.5%. New readers may be interested in the calculation of tangible common equity for all of the banks. You can find it here. (and if you want to convert tangible leverage to a % along the lines of the WSJ piece, just divide one by the tangible leverage ratio highlighted in yellow. For Citi, it’s 1 / 66 = .015 or 1.5%)
Anyway, on to the news. (From the WSJ):
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…
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 problem with this approach is that it is another half-measure that only delays the inevitable…
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