Geithner’s Latest Gift To Citigroup Owners Finally Done*


*Update: The announcement is now out. See full text below.  And it’s not as egregious a giveaway as initially reported!  Geithner is only paying about 30% too much for your Citigroup common stock instead of 100% ($3.25 a share instead of $5). 

Earlier: The New York Times says the deal is done. The Wall Street Journal said the deal was done and then printed a correction saying it wasn’t done.  Whatever.  It’s done.

And here’s the deal:

You, the taxpayer, will be converting your dividend-paying Citigroup preferred stock into non-dividend paying Citigroup common stock. And because Treasury Secretary Tim Geithner seems determined to gift as much of your money as possible to Citigroup stakeholders as possible, you’ll be doing this at $5, more than twice Citigroup’s closing share price.

If this were a homeowner bailout, it would be equivalent to the government paying you $500,000 for your house when it’s only worth $250,000.  Of course that’s never going to happen.  (And, of course, in this case, Citi’s house is only worth $2.50 because taxpayers gave Citi massive second and third mortgages.  If they hadn’t, it would be worth zero.).

The Treasury Secretary will try to make it look as though he got you a great deal because he also gets to fire half of the Citigroup board.  But that’s just a symbolic concession.  Boards don’t run companies.  And a new board won’t stop Citigroup’s asset values from plummeting so that the company will soon need even more of your money.

Which brings up another problem with Geithner’s plan.  It doesn’t address Citigroup’s asset problem.

(What should Geithner have done?  Forced Citi to write down the value of its assets to nuclear-winter levels, and then converted a bunch of Citigroup debt to equity–including the US’s preferred stock. Instead, he just gave your money away.

What is Geithner thinking here?  He’s desperate to avoid taking majority ownership of Citi, in part because Citi’s gigantic hairball of a balance sheet will suddenly be put on the US’s books.  He also doesn’t want to send a paroxysm of panic through the bank debt market by notifying bank debt holders that the bonds they own aren’t, in fact, as safe as Treasury Bills but pay much higher interest–which is currently the case. So Geithner’s capping the US ownership at 40% and keeping bondholders whole.)

Here’s the NYT:

The Treasury Department reached a deal late Thursday to take a stake of 30 to 40 per cent in Citigroup as part of a third bailout of the embattled bank, according to several people close to the deal.

Vikram S. Pandit, the chief executive, will remain at the helm, but Citigroup will have to shake up its board so that it has a majority of independent directors, a move that federal regulators had already been pursuing.

Under the terms of the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock.

It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said.

The Treasury Department will match the private investors’ conversions dollar-for-dollar. That accounts for uncertainty in how big the government’s stake will be…

Details remain murky, but the government has agreed to convert its investment at a price of as much as $5 a share, more than twice the value of Citigroup’s $2.46 closing share price on Thursday.

Full text:


NEW YORK–(BUSINESS WIRE)–Citi today announced it will issue common stock in exchange for preferred securities, which will substantially increase its tangible common equity (TCE) without any additional U.S. government investment. The transaction is intended to build Citi’s TCE to a level that removes uncertainty and restores investor confidence in the company.

Citi will offer to exchange common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 a share. The U.S. government will match this exchange up to a maximum of $25 billion face value of its preferred stock at the same conversion price. (See attached transaction summary).Citi Chief Executive Officer Vikram Pandit said, “This securities exchange has one goal – to increase our tangible common equity. While we believe Tier 1 capital remains the most important measure of the financial strength of banks, we recognise that the markets also view Tangible Common Equity as an important measure. This transaction – which requires no additional investment from U.S. taxpayers – does not change Citi’s strategy, operations or governance. Our clients and partners will not be affected and will continue to receive the high level of service they expect from Citi around the world.”

This transaction could increase the TCE of the company from the fourth quarter level of $29.7 billion to as much as $81 billion, which assumes the exchange of $27.5 billion of preferred securities, the maximum eligible under this transaction. Citi’s Tier 1 capital ratio is 11.9 per cent as of December 31, 2008, and is among the highest of major banks. This ratio is not impacted by this transaction.

Based on the maximum eligible conversion, the U.S. government would own approximately 36 per cent of Citi’s outstanding common stock and existing shareholders would own approximately 26 per cent of the outstanding shares. All investors’ new stakes will be determined following the exchange.

Citi will offer to exchange:

  • Interim securities and warrants for privately held convertible preferred securities;
  • Interim securities and warrants for U.S. government-held preferred securities; and
  • Common stock for publicly held convertible and non-convertible preferred securities.

The interim securities will convert to common stock, subject to shareholder authorization of the additional common stock needed for the transaction. The interim securities are common stock equivalent. The warrants entitle the holders to purchase shares of Citi common stock at $0.01 a share if such shareholder authorization is not obtained. If shareholder authorization is not received, the interim securities will pay a 9 per cent dividend that will increase quarterly.

The non-U.S. government exchange will accommodate all preferred stock holders other than trust preferred holders. The Government of Singapore Investment Corporation (GIC), HRH Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud, Capital Research Global Investors, Capital World Investors and other investors have said they will participate in the exchange. Depending upon the participation rate in the exchange, holders of Trust Preferred Securities (TruPs) and Enhanced Trust Preferred Securities (ETruPs) may also be eligible to participate.

The U.S. government will exchange the portion of its existing preferred securities that is not exchanged for common shares into new trust preferred securities. These securities will carry an annual coupon of 8 per cent.

In connection with the transactions, Citi will suspend dividends on its preferred shares. As a result, the common stock dividend also will be suspended. The company will continue to pay the distribution on its Trust Preferred Securities and Enhanced Trust Preferred Securities at the current rates.

The company will host an investor conference call today at 8:30 am (EST). Dial-in numbers for the conference call are as follows: US & Canada: (877) 700-4194 / International: (706) 679-8401; Conference code: 88132598. A live webcast of the call will be available at Citi’s Investor Relations website:


Citi, the leading global financial services company, has approximately 200 million customer accounts and does business in more than 140 countries. Through its two operating units, Citicorp and Citi Holdings, Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Additional information may be found at or

In connection with the proposed exchange offer, Citi will file with the Securities and Exchange Commission (the “SEC”) a Registration Statement on Form S-4 and a tender offer statement on Schedule TO that will contain a prospectus and related exchange offer materials. Citi will mail the prospectus to the holders of its series of convertible and non-convertible public preferred stock and TruPs and ETruPs that may be eligible to participate in the exchange offer. Holders of these series of preferred stock, TruPs and ETruPs are urged to read the prospectus and related exchange offer materials when they become available because they will contain important information. You may obtain a free copy of the prospectus and related exchange offer materials (when available) that Citi will file with the SEC at the SEC’s website at The prospectus and related exchange offer materials (when they become available) may also be obtained for free by accessing Citi’s website at and clicking on the link for “Investors” and then clicking on the link for “All SEC Filings” or by contacting Citigroup at the following address or telephone number: Citigroup Document Services, 540 Crosspoint Parkway, Getzville, NY 14068, or within the United States, at +1-877-936-2737 or outside the United States, at +1-716-730-8055, or by e-mailing a request to [email protected].

  OVERVIEW OF CITI TRANSACTION TO REALIGN CAPITAL STRUCTURE     U.S. Government Preferred Stock Exchange Target Securities    — TARP Series H Preferred Stock ($25 billion) issued on October 28, 2008

Amount Exchanged    — Amount exchanged will equal the amount of preferred stock of private and public holders and trust preferred securities exchanged, up to $25 billion

Exchange Price    — $3.25/share at par

U.S. Treasury Receives    — Interim securities and warrants (See below)

Remaining Preferreds    — All outstanding preferred stock not exchanged for the interim securities will be exchanged for trust preferred securities with a coupon of 8%

Non-target Securities    — TARP Series I Preferred Stock ($20 billion) issued on December 31, 2008 and Series G ($7 billion) will each convert into separate trust preferred securities with a coupon of 8%

  Privately Placed Convertible Preferred Stock Exchange Target Securities    — Private convertible preferred stock (series A1, B1, C1, D1, J1, K1, L2, N1) initially issued on January 23, 2008

Amount Exchanged    — Target $12.5 billion

Exchange Price    — $3.25/share at par

Investors Receive    — Interim securities and warrants

Remaining Preferreds    — Dividends on outstanding preferred stock not exchanged will be suspended

  Publicly Issued Straight and Convertible Preferred Stock and Trust Preferred Securities Exchange Target Securities— Public preferred stock (series AA, E, F) issued in January, April and May 2008

— Public convertible preferred (series T) issued in January 2008

— Enhanced Trust Preferred Securities

     — Trust Preferred Securities

Amount    — Target $14.9 billion

Exchange Price    — $3.25/share at premium to market

Investors Receive    — Common stock

Remaining Preferreds    — Dividends on outstanding preferred stock not exchanged will be suspended

     — eTruPS and TruPS distributions remain unchanged

  Other Terms Maximum Exchange Amount    — Total of $27.5 billion of privately placed and publicly issued preferred stock, and trust preferred securities

Exchange Eligibility— The exchange will accommodate private and public preferred stock

     — Depending upon the participation rate in the exchange, TruPS and eTruPS may also be eligible to participate

    Interim Securities and Warrants Securities    — Common equivalent securities mandatorily convertible into common stock on a one-for-one basis upon stockholder vote

Warrants    — Warrants to acquire up to 790 million shares of common stock at $0.01/share

  Stockholder Vote Interim Securities and Warrants Issuance    — No vote is required for the issuance of interim securities and warrants

authorised Common Stock    — Vote required for charter amendment to increase authorised common stock to permit conversion of interim securities into common stock

If Vote Passes— Interim securities convert into common stock

     — Warrants are cancelled

If Vote Fails— Interim securities receive greater of dividend on common or dividend of 9%, which increases by 200 basis points every quarter until it reaches 19%

     — Warrants become exercisable at any time