The federal government increased the government's ownership stake to 36% from 8% through a conversion of up to $25 billion in preferred shares issued last fall under the Troubled Assets Relief Program (TARP) on February 27, 2009. Let us recap some important points of this deal.
• Preferred shareholders will convert up to $27.5 billion of shares to common shares under the deal. If the maximum share conversions take place, the U.S. government will own 36% of Citi's outstanding common shares, and existing shareholders will own approximately 26%. The conversion is occurring at a price of $3.25 a share.
• The dilution of existing shareholders (existing shareholder will see their stake diluted by 74%) under the plan was greater than many expected and sparked a sell-off in Citi shares.
• The move doesn't involve additional funds to Citi from the Treasury, which has invested $45 billion in the bank under TARP. However, it will boost Citi by improving the bank's tangible common equity ratio,
• Citi will suspend dividend payments on the preferred shares.
• The government's remaining preferred stock will be converted to a new security that will pay the same 8% cash dividend as the current preferred shares, the Treasury said.
The risk of bank nationalization:
• Full nationalization - giving the government 100% of the bank - would wipe you out altogether; by giving the bank the chance to turn itself around, you may be able to keep some small portion of your shareholding.
• The nationalized banks will be forced to increase lending volumes artificially, making their competitors’ lives even more difficult. Private investors might decide to avoid the banks that remain fully private because of the higher perceived risk. Moreover, that could bring even more banks to the edge of collapsing.
• A new government lending institution, while that institution might be very slow in getting organized and not a particularly intelligent competitor once it did, it would be able to use the resources of the Federal government to make credit-card loans, automobile loans and mortgage loans at subsidized rates.
The Benefit of bank nationalization:
When a bank is nationalized, the public's interests are put before shareholders. That means a struggling bank can be restructured in ways that best suit the financial health of the nation.
In addition, if the government bought up the toxic assets, that could wipe out some of the uncertainty that has been plaguing financial markets for months because it hopefully would keep the value of the assets from falling further.
