Government Bails Out Citi AgainThe U.S. government has for the third time in less than a year offered a lifeline to the mega bank Citigroup. Today it announced a deal with the bank that will give the government control over up to 36 percent of the bank's common stock. The ailing bank shifted preferred shares to common stock to increase its capital.
In premarket trading, the bank's stock share price slid 46 percent. The government has already handed Citigroup $45 billion in trade for preferred shares and warrants in the company. The new deal won't give the bank any additional money, but converts the preferred shares the Treasury already holds in Citigroup, in a move that is meant to improve the bank's capital, which is now at 1.5 percent. The FDIC's measure says a bank is critically undercapitalized if the tangible equity-to-asset ratio is 2% or less.
The taxpayers lose about $2 billion in this move to common shares, and the government is more at risk by assuming the common shares. Treasury's move to aid one of the country's largest institutions is seen as vital to the actions being taken to repair the financial system. Citigroup's conversion also improves the bank's balance sheet.
The deal converts up to $25 billion of preferred shares, but must be matched by money that Citigroup brings in from other private investors. Shares of Citigroup have dropped in value about 90 percent in the past year. The deal also stipulates that Treasury will replace a majority of the bank's board, but CEO Vikram Pandit and Chairman Richard Parsons will keep their positions.
The market opened and immediately dropped 130 points on the Citi news, along with news of the GDP dropped 6.2 percent in the fourth quarter of 2008, its worst reading in 26 years.
FDIC 'Troubled Banks' List: Now At 252
The Federal Deposit Insurance Corporation (FDIC) says the number of problem banks shot up in the fourth quarter to 252 -- up from 171 in the third quarter of 2008.
FDIC Chair Sheila Bair says that this is one of the most difficult periods the FDIC has encountered in its 75-year history. The banks that end up on the closely watched list are usually ones that have financial difficulties or have operation or management problems. Few ever reach the point of failure -- on average only 13 percent of banks on the list actually fail.
While the FDIC doesn't name the banks on the list, the total assets of the banks on the list increased to $159 billion during the last quarter, an increase from the $116 billion in the third quarter. By last Friday a total of 14 banks have failed in 2009. Only two credit unions have closed in 2009. The FDIC late last year announced it was hiring 1,400 more employees, in part due to the expected increase in bank failures due to rising loan losses in the receding economy.