The U.S. government will boost its stake in Citigroup Inc to as much as 36 percent, bolstering the banking giant's capital base in one of the most dramatic efforts yet to prop up the ailing banking industry.
The government will swap up to $25 billion of its preferred shares into common stock, dramatically diluting existing shareholders. Citigroup will stop paying dividends on its preferred and common stock, and promised to shake up its board of directors.
The announcement on Friday does not immediately inject more money into Citigroup, but gives Chief Executive Vikram Pandit more time to shrink the third-largest U.S. bank, sell unwanted assets and restore investor confidence. It also gives the government a far greater say in Citigroup's affairs, short of an outright nationalization.
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.
Separately, Citigroup said 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 above $17 billion, and Citigroup's full-year loss to $27.7 billion.
This capital should take confidence issues off the table even in a stressed environment, Pandit said in a conference call.
In premarket trading, Citigroup shares were down 96 cents at $1.50. Standard & Poor's 500 stock index futures fell 2.4 percent after the U.S. Commerce Department issued a revised estimate showing gross domestic product falling at an annualized 6.2 percent in the fourth quarter, a much steeper drop than analysts expected.
Other banks also tumbled, with Bank of America Corp down 17 percent, Wells Fargo & Co down 12 percent and JPMorgan Chase & Co down 3.8 percent.
SOME SHAREHOLDERS PARTICIPATE
The bailout is the third aid package that Citigroup has gotten from the government since October. The bank had previously issued $45 billion in preferred shares, and gotten a backstop to limit losses on $301 billion of toxic assets.
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 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.
Citigroup said the exchange could result in its share count increasing to as many as 21 billion shares from a current 5.5 billion.
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.
Increasing the share count would boost Citigroup's tangible common equity ratio, a measure of capital, to between 5.4 percent and 8.1 percent from the fourth quarter's 3 percent, the bank said.
The agreement followed more than a week of negotiations between the Treasury and Citigroup, which was once the world's largest bank and had a market value about $270 billion.
U.S. President Barack Obama signaled broad support for the nation's banks this week, introducing a fiscal 2010 budget plan that could allow the Treasury to buy $750 billion more in securities from the banking sector.
Citigroup and other large banks are expected to undergo stress tests soon to assess their ability to cope with a severe recession, and whether they might need more capital.
(For a graphic on Citi's decline, click on: https://customers.reuters.com/d/graphics/MKT_CITI0209.gif
(Additional reporting by Saeed Azhar and Kevin Lim in Singapore and Rafael Nam in Hong Kong; writing by John Stonestreet; editing by Dan Lalor and Jeffrey Benkoe)