Uncle Sam announced plans Friday to toss yet another lifeline to Citigroup by converting its preferred shares to common stock, a move that allows the struggling financial behemoth to boost a key capital ratio and hopefully reassure skittish investors. Under the plan, the Treasury Department would swap up to $25 billion of preferred stock as long as other big Citigroup investors do the same. Should the deal go through, the government would own as much as 36 percent of Citigroup's common stock.
Here are five things you need to know about the development:
1. Tangible Common Equity: Citigroup's share price has been hammered of late amid concern that the company doesn't have enough capital to absorb its massive losses. Investors have grown particularly concerned about a specific bucket of capital—know as tangible common equity—that does not reflect the $45 billion that the government has pumped into the company. By converting these preferred shares into common shares, the government is enabling the company to boost this key buffer against losses. Assuming that other big investors go along with the plan, Citigroup's tangible common equity could increase to as much as $81 billion, up from just under $30 billion in the fourth quarter. "This securities exchange has one goal: to increase our tangible common equity," Citigroup CEO Vikram Pandit said in a statement.
2. Is that Enough? Gary Townsend, ex-bank analyst and the current president and CEO of Hill-Townsend Capital, says he expects most preferred shareholders to go along with the plan and convert their shares as well. But while that would give Citigroup a strong tangible common equity position, it wouldn't get them out of the woods altogether. "We still have the question of what additional losses are out there in an economy that doesn't seem inclined to turn around anytime quickly," Townsend said. Not to mention all those toxic assets the company is sitting on.
3. More cash: The government did not inject more cash into Citigroup as part of the plan. But doesn't mean that the feds won't have to pony up more funds at a later date. Citigroup separately announced on Friday a previously undisclosed writedown that brings the year's total loss to a whopping $28 billion. At the same time, Citigroup—along with the nation's other big banks—will soon be undergoing a so-called "stress test" to ensure that it has the cash to withstand a severe economic downturn. Those considered short of the capital needed for such harsh economic scenarios are expected to receive additional bailout funds from the Treasury.
4. Bank of America: Townsend said Bank of America was "the next suspect" to receive additional government capital. The bank, however, has in recent days insisted that it would not need more government cash. Bank of America "has been quite forceful in its statements that it doesn't need new capital and it doesn't expect to go to the well again, so we'll have to see," Townsend says. "But certainly, the presentment of the balance sheet right now at Bank of America seems to be light on tangible common equity."
5. Management and directors: Today's announcements included no plans for Citigroup CEO Pandit to step down. However, the board of directors is expected to get a makeover, with a fresh crop of independent directors coming on board "as soon as feasible," according to the Treasury Department.