U.S. higher stake in Citigroup

Citigroup Inc. is in talks to give the U.S. Government a higher stake, which will provide the government with a far greater say in the affairs of the ailing bank giant.

When the government takes the large common equity stake in Citigroup, even if it lacks voting control, will be the equivalent of a nationalization. Citigroup stock shares fell below $2 on Friday.

U.S. taxpayers could end up owning as much as 40 percent of New York-based Citigroup's common stock, though Citigroup executives are trying to limit the stake to about 25 percent.

The government could convert a substantial portion of Citigroup's $45 billion preferred shares, equal to a 7.8 percent stake, into common stock, diluting existing shareholders.

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Citigroup is the third-largest U.S. bank by assets.

A larger government stake in Citigroup could fuel speculation that Bank of America Corporation and other banks might also be nationalized possibly causing bank shares to fall, including healthy ones.

Vikram Pandit, Citigroup's chief executive, has tried to stabilize the bank by dividing it in two, creating Citicorp to house healthier businesses the bank wants to keep, and Citi Holdings to house businesses it hopes to sell or wind down.

Governments around the world last week moved to prop up ailing banks, and European Union leaders have backed a doubling of funds for the International Monetary Fund to aid bailouts of banking and other industries.

Citigroup in October and November issued $52 billion of preferred shares to the government, of which $45 billion was considered capital and $7 billion a fee for the U.S. agreeing to share losses on $301 billion of troubled assets.

Converting the preferred stock to common stock is one of many options for the government.

The U.S. government in September took a nearly 80 percent stake in American International Group Inc. (AIG), the large insurer.

Analysts say Citigroup and many rival banks in the U.S. do not have the ratio of tangible common equity to tangible assets for a strong capital foundation.

Converting Citigroup preferred shares would add pressure on Bank of America, which received $45 billion from the U.S. government and a loss -sharing pact -- a loss-sharing pact with taxpayers -- on $118 billion of assets.

Saudi Prince Alwaleed bin Talal is the largest individual shareholder of Citigroup.

About three-fourths of those assets came from the former Merill Lynch and Company, which Bank of America bought on Jan. 1.

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Bank of America is the largest U.S. bank.

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Citigroup stock fell 20 percent Friday, while Bank of America fell 12 percent in afternoon trading and came off their lowest levels.

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Investors have shown decreasing confidence that U.S. banks can right themselves.

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Citigroup and Bank of America have already received a lot of help from the government, which has done very little to improve their dire situation.

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Financial Times

FOX Business

Money.CNN.com

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Citigroup is far too damaged due to the global financial crises to recover on its own. It's inevitable that they and other banks will eventually be nationalized. U.S. and world markets are too damaged for some banks to recover on their own.

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D. Brian Blackwell