Citi-Dilemma …
What will the Government do with one of the bad banks …. Citibank
Here an interesting calculation by Wall St. Journal …
In a joint statement Monday, the Treasury and regulators said banks shouldn’t be owned by the government, and should have a high-quality capital base.
For some banks, a quick way to do that would be to change government preferred shares into common stock, or, second best, securities that convert into common stock.
Such a move would strengthen tangible common equity, or TCE, a measure of capital strength. Federal officials are considering such a swap at Citi, whose shares leaped 9.7% Monday.
However, there would be hard choices. Assume the government wants a maximum stake of 40% in Citi’s common equity. Citi has 5.92 billion shares outstanding, on a diluted basis, so the government would need to add about 3.95 billion shares for a 40% holding.
The conversion price then becomes the big issue. Any TCE boost needs to see Citi through the downturn. That could mean taking the ratio up to at least that of J.P. Morgan Chase, 3.8%. The government would need to convert $29 billion of preferreds into common equity. But to stay below 40% would mean converting at a price above $7 a share. That would be so far above Monday’s closing $2.14 share price that it might be considered politically risky.
If putting Citi’s TCE worries to rest once and for all is the government’s aim, it has two options: Owning more than half of Citi or paying a big premium.
So … IMHO … whatever they do … the market won’t like it too much …
Tags: Citibank, nationalization
