Citi is closer to getting a fresh bailout from the Treasury. The deal could be announced as early as tomorrow.
Here are the details of what is being worked out, according to the Financial Times:
- The government will convert part of its $45 billion of preferred shares into Citi’s common stock, a move intended to boost the tangible common equity of the bank.
- Other preferred holders, including sovereign wealth funds and pension funds, will convert some of the outstanding $30 billion of non-government preferred stock. This will help dilute the government’s share, keeping the government from owning a majority of the shares in the bank.
- Citi is considering attempting to seek more capital from the markets, perhaps through a private offering.
The exact details of the conversion price of the preferred shares are being worked out. The price, it seems, will depend on how much money could be raised from private investors—both the outside holders of preferred shares and new money from an equity offering—so that the government can hold its stake down to the 40% level. It’s that level that seems fixed, with the conversion pricing being built around it.
Why is the government obsessed with only taking a 40% stake? It seems that the Treasury Department is desperately resisting taking a controlling stake in the company. A 40 per cent stake allows the government to remain a minority shareholder even if it needs to inject new capital in the future.