U.S. Eyes Huge Citi Stake — Not Nationalization

One day after assuring investors that it did not intend to nationalize certain key banks — and despite remarks from key lawmakers suggesting otherwise — the U.S. government is instead looking to take a massive 40 percent stake in troubled Citigroup, Inc. (C), the Wall Street Journal reported Sunday evening. The government investment would involve converting preferred shares into common shares, according to various published reports; the Journal cites Citigroup insiders in suggesting that the bank hopes the taxpayer share is closer to 25 percent, should such an intervention take place. The same sources suggested that Citigroup had proposed the plan to its regulators, the news service reported. On Friday, White House Press Secretary Robert Gibbs said that the Obama administration did not intend to nationalize all or even some of the U.S. banking system. “This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,” Gibbs said. “That’s been our belief for quite some time.” In a joint statement released by key regulators Monday, the government sought to clarify that it is looking for banks to raise private capital first. “The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses,” the statement read in part. “[I]nstitutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government.” While much of the press has been breathlessly painting the proposed move as a step towards nationalization, investors clearly have voted otherwise with their pocketbooks, and analysts have strongly suggested any such speculation is unfounded. Shares in Citigroup jumped more than 10 percent in early trading Monday on the news, while Bank of America Corp. (BAC) rose more than 7 percent. Both banks had tanked in trading on Friday on investor fears. “Not only is ‘nationalization’ just ahead of socialism in the dictionary, but it is political suicide,” said one source, a senior vice president at a bank that asked not to be named in this story. “The problems are the loans, not the organizational structure or the ownership structure of the financial institutions holding them.” The same source suggested instead that the proposal from Citigroup represented more of a “muddle through” approach to the ongoing financial crisis. Analyst Mark Hanson with The Field Check Group echoed similar logic in a note to clients Monday, saying that the potential move by regulators and the government would be “far from” a move towards nationalization. “If the new way of dealing with banks is to clear up all preferreds — both government and non-government — then this resolution that can be copied across banks is a clear positive to the alternatives.” Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tenn., suggested Monday that the joint statement from bank regulators may portend a pending expansion of the Federal Deposit Insurance Corp.’s extremely successful Temporary Liquidity Guarantee Program. “Moving out to 5-year maturities from date of issuance seems reasonable as does the removal of the funding ties to either debt rollover or any new asset acquisitions,” he said. He also expects the FDIC to extend the program’s issuance deadline beyond its current expiration date four months from now. “If nothing else, the program is going to add significant dollars to the FDIC insurance fund with the likelihood of claims against TLG debt remaining a remote outcome at this stage.” “The people who are talking about nationalization all mean something different. Or don’t know what they mean,” said an ABS/MBS analyst that asked to remain anonymous. “And if the government is pushed to take over Citi and BofA and start liquidating the naughty bits we might as well shutter the windows, bar the door and sit with our guns in our lap.” Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.