2 Mar 2009

Concern over rise in US govt stake in Citigroup

11:48 am on 2 March 2009

A move by the US government to boost its equity stake in Citigroup to as much as 36% has fanned fears it will take a bigger role in overseeing some other troubled major banks.

The federal government is increasing its stake in Citigroup from 8% to 40%.

The BBC reports the move gives the government more of a voting stake and far greater influence over the bank's operations. However, it is still short of outright nationalization.

The deal does not require extra taxpayer investment and is dependent on Citi raising extra private capital.

Citi shares ended down more 39% on Friday as investors worried about their stake in the bank being diluted by the move.

Citi is one of the banks hardest hit by the continuing credit crisis, Citi has already obtained $US45 billion from the Treasury.

It also has guarantees protecting it from the bulk of losses on $US306 billion of risky investments.

The latest agreement involves the government converting some of its preferred stock to common shares. As part of the deal, the bank will suspend paying dividends and will also install new independent directors on its board.

The bank made a loss of $US8.29 billion in the final three months of 2008, and was forced to split into two new companies.

The government will raise its stake to match that put up by private investors and it has said it preferred banks to remain in private hands.

Last week, Citigroup's share price fell below $US2.

At present the government's preferred shares represent a 7.8% holding in the company.

Consistent losses

The move means Citi shareholders will see their stakes diluted and the government will have a much larger influence over the bank.

Citigroup, was worth $US273 billion but has since reported five consecutive quarterly losses, following a meltdown in sub-prime mortgages - made to people on low incomes or with poor credit ratings.

Some 52,000 jobs were cut last year, bringing the Citi workforce down to about 323,000 people.