The U.S. government and embattled financial giant Citi (New York) have reached a deal in which the feds would play a greater role in the company's operations.
According to a report from Reuters, the government would convert up to $25 billion in its preferred shares in the bank into common equity, greatly increasing its stake in the bank.
The conversions will depend on whether the bank can find private investors willing to do the same. However, it ultimately could result in the federal government obtaining 30 percent to 40 percent of Citi's common stock, greatly increasing the firm's equity capital ratios so it can better withstand losses, according to Reuters.
A report in The Wall Street Journal said Citigroup will offer to convert nearly $27.5 billion in preferred stock sold to private investors and the public and up to $25 billion in preferred stock bought by the government into common stock. The exchange, if fully executed, would leave the U.S. government with 36 percent of the bank's shares. Existing shareholders' stake would be cut to 26 percent. Shareholders will have to approve much of the common stock issuance, according to the Journal.
Additionally, the Journal said the government is demanding that the company overhaul its board of directors. Citigroup's board will soon include a majority of new independent directors. Chief executive Vikram Pandit is expected to keep his job under the agreement.
A report earlier this week in the Journal showed the relationship between Citi and the government is off to a "rocky start." For example, the article said the Fed informed Citigroup executives that it has "observer rights" that entitle the agency to participate in the bank's board meetings. According to the Journal: "Though the government hasn't joined in so far, the fact that it might has led some Citigroup executives to complain privately that the U.S. now has 'unlimited power' over the bank. One person close to the company compared the government's role to the sword of Damocles, an ever-present evil hanging over their heads."
In addition, the feds have been forcing Citi to "consider a range of unwanted options," said the Journal, such as selling Smith Barney and perhaps selling its Banamex consumer banking unit in Mexico, along with a number of requests that compel Citi to report its movements and spending to the government at a very granular level.
The Journal also noted statements made by Citigroup's investment-banking chief, John Havens, around pushing his deputies to further streamline operations to reduce costs. When asked by an executive about the speed with which the changes were needed, Havens said "the question 'is typical Citi,' suggesting that decisions at the company take too long, according to a person at the meeting. 'That's why Geithner is so intolerant with us these days,' Mr. Havens told the bankers."