Citigroup announced it was going ahead with a plan to swap the government's preferred shares into common equity, a move that will leave the government owning more than a third of the company and an acknowledgment that more than $50 billion in government capital and a backstop on more than $300 billion in troubled Citigroup assets haven't been enough to stop the bank's slide.
Under the deal, Citigroup said it will offer to convert nearly $27.5 billion in preferred stock sold to private investors and the public and up to $25 billion in preferred stock bought by the government into common stock. The exchange, if fully executed, would leave the U.S. government with 36% of the bank's shares. Existing shareholders' stake would be cut to 26%. Shareholders will have to approve much of the common stock issuance.
Additionally, the government is demanding that the company overhaul its board of directors. Citigroup's board will soon include a majority of new independent directors, the company said Friday. It's stock plunged on the news.
The swap won't involve any additional investment in Citigroup by either the government or the private shareholders, but will boost the bank's so-called tangible common equity ratio, which is closely watched by analysts. It will also relieve the bank of the need to pay billions of dollars in annual preferred stock dividends.
Separately, Citigroup announced it will record $10 billion in write-downs for the fourth quarter, boosting the year's net loss to $27.7 billion.
Fannie Mae late Thursday reported a $25.2 billion loss for the fourth quarter as homeowner defaults rose and the value of derivative contracts used to hedge against interest rate risks fell.
For the full year, Fannie had a loss of $58.7 billion, compared with a year-earlier loss of $2.1 billion and the company said it expects that the housing and financial-market conditions that led to 2008's huge losses to continue and possibly worsen in 2009. The loss for 2008 exceeds net income for the preceding 17 years.
The deepening financial problems at Fannie set up some tough choices for the Obama administration, which will have to decide whether to continue pumping taxpayer money into the firms to keep them operating or break them into pieces and strip them of their government support.
since September, when the federal government effectively took control of the company, focus has shifted away from making profits to carrying out government housing policy. But thus far, Fannie has rewritten just a tiny fraction of the mortgages it owns or guarantees.
Daniel Mudd, a former Marine officer who was ousted as Fannie's CEO when the regulator took over, likens the takeover to the U.S. invasion of Iraq. The troops got to Falluja in a couple of weeks and seized the radio towers, but there was no plan to run the country once the shooting stopped, he said.
Fannie's government-appointed CEO, Herbert Allison, said: It's not about maximizing returns on equity or profits. It's really about being of use to the country during this very difficult period.