We are back to weekend melodrama, but this one is starting on Sunday night, not a Thursday or Friday. Not good.
Citigroup is apparently throwing itself on the mercy of the court, um, taxpayers, once again, but even the bankster favoring Geithner/Summers team know that the public at large is losing patience with financial firm bailouts in general, and favored treatment towards recidivists like Citigroup in particular. The pound of flesh is about to come due, and there is no Portia in the wings to argue why that would extract more than the contract terms.
The interesting thing is that Citi approached the powers that be (again) yet there does not seem to be any pressing need for a Federal (further) rescue, as in a depositor or counterparty run. Citi merely seems to be wanting to get out in front of the deterioration of its book (the party line is it won’t do well in the Treasury stress test, but given the collapse in its stock in the last ten days, one has to wonder).
And that means it must look REALLY ugly.
From the Wall Street Journal:
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%,…
The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis…
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…
Bank of America Corp. said Sunday that it isn’t discussing a larger ownership stake for the government…
There’s no universal agreement on what constitutes nationalization of a bank. In the U.K., the government already owns 43% of Lloyds Banking Group PLC, and last week it moved to increase its ownership of Royal Bank of Scotland Group PLC to 70% from 58%. Those two banks have been classified as “public-sector entities,” and as much as £1.5 trillion ($2.136 trillion) of their liabilities have been moved over to the country’s balance sheet….
As part of the plan, Citigroup officials hope to persuade private investors that have bought preferred shares — such as the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority — to follow the government’s lead in converting some of those stakes into common stock, according to people familiar with the matter. That would further bolster an obscure but increasingly pivotal gauge of banks’ capital known as “tangible common equity,” or TCE.
The highly complex TCE measurement, one of several gauges of a bank’s financial strength, gives weight to common shares — thus the interest in converting perferred shares to common stock.
Details of the rescue remain in flux….
If the deal gets nailed down, it will be Washington’s third effort to aid Citigroup since last fall. In October,…
There are at least two catalysts for the recent talks with the government.
First, Citigroup’s shares have fallen to historic lows. That doesn’t pose a direct threat to the company’s stability. But if it spooks customers into pulling their business, that could push the bank toward a dangerous downward spiral.
Second, bank 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 TCE measurement as a gauge of bank health, according to people familiar with the matter.
The crisis is triggering a deep re-examination of the way bank health is measured in the U.S. financial system. This is a complex exercise, but it boils down to calculating various ratios of how much cushion a bank has to absorb losses on loans and other bad assets.
Until recently, 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.
The regulators’ new focus on TCE represents an important shift. The government’s recent injections into hundreds of institutions were predicated on the idea that Tier 1 was key. Because the investments weren’t in the form of common stock, they didn’t affect the companies’ TCE ratios.
In Citigroup’s case, converting a significant portion of the government’s preferred stock into common shares would help lift the company’s TCE ratio, perhaps to as high as 4%, according to a person familiar with the company’s thinking.
Update 10:00 PM;
Reader Early Writedown pointed to an Obama Administration statement earlier today:
Some details will be made available this week, but parts of the plan will take weeks, months and even more than a year to play out as the Obama administration puts together a program that they hope will return banks to long-term health….
Officials stressed that there were no separate meetings going on surrounding Bank of America or Citigroup specifically and that the two banks would be treated under the broad plan now in the works.
Neither bank has asked for increased government assistance and one official said such assistance is not needed at this time.
Now this gets interesting. Team Obama tried to (basically) preemptively deny the Citi special pleading. The “neither bank asked for increased government assistance”: is misleading. Citi’s request for conversion of preferred to common IS a plea for help; it lowers the cash drain and puts the taxpayer pari passu with common shareholders, rather than in a slightly favored position.
And I would not be surprised that the WSJ (and now Financial Times) stores were deliberate Citi leaks, with plausible deniability, to pressure the government, as best they can.
US stock futures were up on this non-news; the indications are that Team Obama is not ready to blink. It looks like it will (as we surmised yesterday) take a depositor or counterparty run to get them to act. Wonder what the stock market will do when it figures that one out.