Bank insists its board remains in day-to-day control of operations Saturday, 28 February 2009 Citigroup executives insisted yesterday that they were still in day-to-day control of the banking giant and that the company remained an independent shareholder-focused business, despite a big increase in the stake held by the US government. Under a financial restructuring designed to shore up Citigroup's crumbling balance sheet, the government will emerge with a 36 per cent stake in the company, giving it an increasingly powerful voice in how it is run, but stopping short of full-on nationalisation. In return for its additional assistance, the government has extracted a promise that Citigroup will shake up its board of directors so it contains a majority of independent members. The Treasury did not seek the resignations of any senior executives, however, and reaffirmed for now the position of Vikram Pandit, the chief executive, who has said he will work for a $1 salary and no bonus until the company is profitable again. Citigroup has already taken $45bn (£32bn) from the US taxpayer as losses on residential mortgages, commercial real estate and other credit market investments have soured in spectacular fashion. The government is also underwriting $301bn in assets on the bank's balance sheet. Even in the detail of yesterday's announcement, there was more bad news: a $9.6bn goodwill writedown that takes its net loss for 2008 to $27.7bn. No additional government money is going into Citigroup at this stage, but it is easing the financial burden of its existing investment. It is converting $25bn of the $45bn from preferred stock into common shares, which pay only a nominal dividend, and Citigroup will stop paying the current 5 per cent dividend on the remaining preferred shares. Other holders of preferred shares will also swap them for common stock. Common shares are seen as a higher quality form of capital for a bank, and Citigroup asked the government to engineer the swap because it had become dangerously under-capitalised by some measures used by regulators and analysts. "Our business is about confidence," Mr Pandit said yesterday. "This capital should take the confidence issues off the table, even in a stressed environment." He added that he and other senior executives "completely remain in charge" of day-to-day operations, a point reiterated by his lieutenants in interviews throughout the day. Existing common shareholders will be massively diluted if – as is expected – all the preferred shareholders swap their investments. Those existing shareholders will emerge with just 26 per cent of the company, with the government on 36 per cent and other preferred shareholders on 38 per cent. Citigroup shares lost 39 per cent of their value to reflect the dilution, but many investors were pleased a clever solution had been found to ease the pressure on the company's balance sheet without wiping out existing shareholders entirely. The existence of the government as a common shareholder would appear to make it unlikely that any additional future bailout of Citigroup would now wipe out the common equity. That does not mean that Citigroup may not still need to take more taxpayer funds should the economy worsen and its assets slump further in value, something that could push the government's stake closer to or beyond 50 per cent. The US Treasury department is "stress-testing" all the major banks to see if they have enough capital to survive a recession longer than economists are currently predicting, and it has promised to give money to banks that do not. Citigroup, meanwhile, has already found itself bowing to government demands, even before this additional federal assistance. It scrapped delivery of a corporate jet and has supported legislation to allow bankruptcy judges to change the terms of mortgages, something that is anathema to other banks.US government takes 36% stake in Citigroup
Sunday, 1 March 2009
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