New York: Citigroup is in talks that could lead to the US government sharply increasing its stake, turning what was once America’s most valuable bank into a virtual ward of the state and a symbol of the raging global financial crisis.
The Wall Street Journal said the government, by converting a big chunk of the $45 billion of preferred shares it bought last year in an attempt to stabilise Citigroup, could end up owning as much as 40% of the bank’s common equity.
Citi executives hope to limit Washington’s stake to closer to 25%, the paper reported. The preferred shares now amount to a 7.8% stake in the firm.
The Financial Times said Citi’s aim was to keep the government’s stake to no more than 40%, or at least below the 50% mark that would spell nationalisation -- something that is anathema to many US politicians, executives and voters.
The US Treasury declined to comment on Citigroup but said it would consider converting preferred shares it owns in banks into common equity to strengthen their capital structure.
“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,” spokesman Isaac Baker said.
The Citi model
The proposed Citi plan, which would not cost the taxpayer fresh money but would dilute existing shareholders, could be a model for shoring up other banks, the New York Times reported.
“This gives you the sense that authorities’ worries have intensified that problems relating to the U.S. economy may potentially spill over to the rest of the world,” said Sailesh Jha, senior regional economist at Barclays Capital in Singapore.
At a summit in Berlin on Sunday, European Union leaders backed a doubling of funds for the International Monetary Fund, whose finances have been stretched by bailouts of governments in Eastern Europe and elsewhere.
“We’re dealing with an extraordinary international crisis the likes of which we have not seen for decades, both as regards financial markets and the global economy,” German Chancellor Angela Merkel said.
Latvia’s government collapsed on Friday and the currencies of countries such as Poland, the Czech Republic and Hungary have come under severe pressure, hitting millions across the region who have borrowed in foreign currencies such as the euro.
Citi’s talks with the government followed a slump in its shares last Friday. Investors drove the stock lower on fears that big US banks could be nationalised as the recession, which began in the housing sector, rages unchecked through the economy.
Asian stocks rose and the dollar fell on Monday in response to the reports on relief that the scale of Citi’s problems are at least becoming clearer. US equity futures rose 1.3%.
“They are certainly moving much faster this time, and it can be taken as a commitment that some banks are too big to fail and the economic consequences too bad to contemplate,” said Tony Morriss, senior markets strategist at ANZ investment bank in Sydney.
But some other market-watchers suspected the rally would be short-lived until investors know for sure how much the crisis will cost taxpayers and shareholders.
Gloom in Asia
The reports of Citi’s woes coincided with more grim economic news from across Asia.
The Thai economy shrank 6.1% between the third and fourth quarters, while Singapore’s prime minister said the export-dependent city state’s economy could contract by more than 5 percent this year.
Toyota Motor Co, the world’s largest automaker, plans to cut global production at the parent company level by 20% this year to 6.5 million units as demand plunges, the Nikkei business daily reported.
And SFCG Co Ltd, a Japanese lender to smaller companies, failed with debts of $3.6 billion, making it the country’s biggest bankruptcy filing this year measured by the amount of debt.
Even though his young administration is still busy fighting fires, US President Barack Obama is also looking ahead to the austerity policies that will be needed to repay the trillions of dollars Washington is pumping into the financial, housing and auto sectors.
Obama, who chairs a fiscal responsibility summit on Monday, is expected to unveil a plan to halve the budget deficit by 2013 with a mix of tax increases on wealthier Americans and spending cuts. Private economists project a deficit of $1.5 trillion this year.
Obama releases his first budget on Thursday, while Federal Reserve Chairman Ben Bernanke testifies to Congress from Tuesday.
Analysts expect him to offer assurances that the central bank, which has slashed interest rates to near zero and flooded markets with dollars, still has the ammunition to pull the economy out of its worst downturn since the 1980s.