U.S. May End Up With 40 Percent Of Citi

(CBS/AP)  Bank stocks rose in early morning trading Monday after hitting new lows last week as investors welcomed the possibility that the government would increase its ownership stake in struggling Citigroup Inc. - an alternative to nationalizing the bank.

The Wall Street Journal is reporting the U.S. government could wind up holding as much as a 40 percent stake in Citigroup by converting preferred stock it has purchased in the bank in recent months into common stock.

Citigroup declined to comment on the Journal report.

Fears of bank nationalization have grown in recent weeks as investors fret about possible takeovers of some of the nation's most troubled banks. Exactly how a potential government takeover could be shaped has concerned investors since few details of additional potential support for the industry have emerged, fueling the recent sell-off.

Federal regulators pledged Monday to do all they can to shore up the struggling U.S. banking system and said they will launch a revamped program to inject fresh capital into financial institutions this week.

The Treasury Department, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision and the Federal Reserve jointly issued the statement amid growing concern that some of America's biggest banks may need additional assistance to survive the fallout from the worst financial crisis since the 1930s.

A senior Treasury official told CBS News chief political consultant Marc Ambinder that the joint press statement was designed to send the message, in light of Citibank's plunge, "We are not rushing towards nationalization at all."

Under the reported government plan for Citigroup, current shareholders' stakes would be diluted - but not wiped out completely - a scenario that would likely happen if the government completely takes control of the bank.

The plan would not pump additional cash into New York-based Citigroup, which has already received $45 billion in capital along with guarantees to cover losses on hundreds of billions of dollars in risky investments and loans from the government amid the ongoing credit crisis. The potential move would also not mean the government completes a full takeover of the beleaguered bank, which has been among the hardest hit by rising loan defaults and sinking values of some of its investments.

The plan for Citigroup cited by the Journal isn't as drastic as a full government takeover. If the U.S. moves ahead with the plan to convert its preferred stock in Citigroup into common stock, it could provide a blueprint for moves at other banks.

Though declining to specifically discuss a potential deal with Citi, Treasury Department spokesman Isaac Baker said banks can apply to convert the government's preferred stock to new convertible stock that can be turned into common shares at the option of the bank.

"We are open to considering a request to do so if the institution and its regulator believe it would promote the long term stability of that institution, and if we believe it's in the best interest of long term stability of our economy and financial system," Baker said.

Shares of New York-based Citigroup jumped 30 cents, or 15.4 percent, to $2.25 Monday. On Friday, shares of Citi fell 22 percent on increasing fears the bank might be fully taken over by the government.

Citi shares have tumbled for seven straight trading days, falling 47 percent during that stretch. The shares have already lost 71 percent of their value since the beginning of the year.

Citi has actively been working to cut expenses and sell assets as it tries to return to profitability. The bank has posted five straight quarterly losses, including a fourth-quarter loss of $8.29 billion. It is also splitting its operations, separating its traditional banking businesses from riskier operations.

Bank of America Corp., which like Citi has received $45 billion from the government and guarantees on a portion of risky assets, is also among the banks investors fear could succumb to a government takeover.

But like Citi, shares of Charlotte, N.C.-based Bank of America rose in Monday, gaining 38 cents, or 10 percent, to $4.17.

Shares of other banks also rose. Wells Fargo rose 59 cents, or 5.4 percent, to $11.50, Goldman Sachs Group Inc. rose $1.80, or 2.1 percent, to $86.39 and Morgan Stanley climbed 58 cents, or 3 percent, to $20.01.

On Friday, government officials sent mixed signals about the possibility of the government taking over some banks. A spokesman for President Barack Obama tried to downplay potential nationalization talk, while Sen. Christopher Dodd, D-Conn., said some sort of nationalization might be needed on a short-term basis.

In a research note released Monday, Friedman, Billings, Ramsey & Co. analyst Paul Miller said markets are "increasingly factoring in some sort of nationalization of the banking sector," but that while the move might be a "scary proposition for investors," it is likely to provide the quickest and cheapest option to help rid banks of bad assets and recapitalize them.

"We believe the quickest and lowest cost solution is for the government to close down troubled financial institutions, regardless of size, extract the toxic assets, and sell the good portions of these financial institutions to private investors as quickly as possible," Miller wrote in the note.

A similar scenario played out last fall when the government took over Washington Mutual Inc., and quickly sold its strong deposit franchise and other healthy businesses to JPMorgan Chase & Co.

Fox-Pitt Kelton analyst David Trone wrote in a note to clients that nationalization of Citi would likely have negative consequences for the bank that could hurt its earnings power, growth and profitability.

Trone worries that a significant government stake in Citi that leads it to "meddle in Citi's operations and strategy" would scare away potential customers and employees. That in turn could make it unprofitable and thus more difficult to sell back into the public markets, Trone wrote in the note.

FBR's Miller said the duration of government control of any bank would have to be limited, with the largest financial firms being held for about six months to a year at most, in an effort to expedite a turnaround in the industry.

[win4usa]

Spending TRILLIONS of our tax dollars to nationalize banks.

[noloyalisti]

Let's also take over the oil, pharmaceutical and medical insurance corporations!!!! Why should We the People own just the failed businesses. Let's make some money for our children.

[ESKCSG]

Community banks and Credit Unions are emerging as the safer and more lucrative alternative with their reward checking programs.

Check out the latest top bank rates from CheckingFinder.com.

First Robinson Savings Bank - Robinson, IL 6.01
Southern Missouri Bank & Trust 6.01
Bank of Ripley - Ripley, TN 5.26
Communication Federal Credit Union - OK 5.25
LA DOTD Federal Credit Union - Denham Spring, LA 5.25
Keystone Bank - Auburn, AL 5.15
Connexus Credit Union - Wausau, WI 5.15
Altra Federal Credit Union 5.05
Farmers and Merchants - Nashville, IL 5.05
Community State Bank - Poteau, OK 5.05
First State Bank - Kansas City, KS 5.03
State Employees Credit Union - Santa Fe, NM 5.02
Grand Bank of Texas - Grand Prairie, TX 5.02
Harbor Credit Union - Green Bay, WI 5.01
Malvern Federal Savings Bank - Paoli, PA 5.01
Union State Bank - Everest, KS 5.01
United National Bank - Cairo, GA 5.01
First Banking Center - Lake Geneva, WI 5.01
Noble Bank & Trust - Anniston, AL 5.01
The Community Bank - Brockton, MA 5.01
Bank of Little Rock - Little Rock, AR 5.01
Community Bank of Pleasant Hill - Pleasant Hill, MO 5.01
Community Bank of Raymore - Raymore, MO 5.01
Olmsted National Bank - Rochester, MN 5.01
Royal Banks of Missouri - St. Louis, MO 4.78
Texas Citizens Bank - Pasadena, TX 4.76

Courtesy of BancVue.

Bush already nationalized the banks last fall.

[nikosk11]

Communism is inevitable for this country.

Every thing is nationalized.

Posted by niceface19 at 10:45 AM : Feb 23, 2009

You need to read more and learn the difference between communism and nationalization of financial institutions. Better yet, check and find out how the Scandinavian and other European countries do it. You might learn a thing, or two.

[likeitis5050]

Don't be discouraged...with just a little more effort they can reach the magical 51%....it can happen...this is America...where anything is possible if you just hold on to the dream. If you dream it....you can achieve it!!! Yes You Can!!!

[niceface19]

Communism is inevitable for this country.

Every thing is nationalized.

[jon_mccain]

40% of nothing is still nothing. It is time to stop worrying about the shareholders, seize these banks, and do what needs to be done to fix these issues. The Japanese tried everything that has already been put on the table, in the end when all else failed they nationalized the banks anyway and at a much greater cost than if they had done it sooner.

[jtdev1]

So we convert our Prefered stock into Common stock.

Now if Citi declares bankruptcy after that, we will not be paid anything back. Isn't that correct?

The whole purpose of buying Prefered stock was to make sure the taxpayer got paid back before anyone else.

Boy, this sounds like a plan straight from the Bush/Wallstreet play book...

[whitemale09]

Be careful Mr. President!

You can't nationalize the banks without putting them first through 'bankruptcy re-organization' and receivership.

Be brave President Obama and shut down the banks that make up the Federal Reserve System and put them through bankruptcy re-organization!

It's the only way Mr. President.