Citigroup Inc. and the federal government agreed to a third rescue

Citigroup Inc. and the federal government agreed to a third rescue that will give U.S. taxpayers as much as 36% of the bank but expose their ownership stake to greater risk from the recession and housing crisis.
Friday's agreement shows how hard the Obama administration is trying to stabilize the U.S. banking industry without a full-fledged nationalization that would wipe out investors and leave the government in charge. But the deal will punish existing shareholders of Citigroup, who will see their stake diluted by 74%, and likely do little to change the awkward relationship between federal officials and management of the New York company.

Government officials don't see the latest agreement with Citigroup as a template for other rescues, though bank stocks fell on worries that the agreement will be cloned at other suffering U.S. financial institutions.

According to Citigroup executives, the Treasury Department and other banking regulators didn't try to squeeze new concessions from the New York bank. For example, the company wasn't pushed to make more loans, rein in foreclosures or curb executive pay beyond previously agreed or required levels, these people said.
Over the past several days, Treasury Secretary Timothy Geithner and other government officials discussed whether to require the removal of Citigroup Chief Executive Vikram Pandit, according to a person familiar with the discussions. But government officials concluded it was impractical to oust him, partly because of a lack of strong potential successors. A boardroom shake-up already is in motion, largely due to pressure from the Fed.

This rescue also was more palatable because the government isn't pumping in additional taxpayer dollars. Instead, as much as $25 billion in preferred shares held by the U.S. government will be converted into common shares as Citigroup struggles to stabilize itself following more than $37 billion in net losses during the past five quarters.

Depending on how many current holders of Citigroup preferred stock agree to a similar move, the company's tangible common equity could surge to $81.1 billion from $29.7 billion at Dec. 31. That would reverse the recent slide in tangible common equity -- a gauge of what shareholders would have left if the company were liquidated -- that fueled a downward spiral in Citigroup shares.
The conversion leaves taxpayers exposed to the risk of greater losses. The government's preferred holdings had stood ahead of common stock in Citigroup's capital structure, meaning they were less likely to lose value if the company's woes continue to mount. In addition, by converting much of the U.S. stake to common shares, Citigroup won't have to pay the hefty dividend payouts that were attached to the preferred stock.

"The government is bending over backwards to not go along the lines of nationalization," said Bernie Sussman, chief investment officer of Spectrum Asset Management, a unit of Principal Financial Group Inc. that manages about $6.9 billion in assets. "They had the alternative to completely zero out the common stock."