The U.S. government will exchange up to $25 billion in emergency bailout money it provided Citigroup Inc. for as much as a 36 percent equity stake in the struggling bank.
The deal announced Friday — the third attempt at a rescue plan for Citigroup in the past five months — is contingent on private investors also agreeing to a similar swap.
The aim is to keep the New York bank holding company alive and bolster its capital as it faces growing losses amid the intensifying global recession. Existing shareholders would see their ownership stake shrink to as litte as 26 percent and the bank said it is eliminating all dividends on common shares.
Investors appeared disappointed in the deal and expected dilution of their stake, sending shares plummeting 94 cents, or 32.8 percent, to $1.56 in premarket trading. The news also dragged down stock futures ahead of Friday's market opening.
Underscoring its precarious nature, the company also disclosed that it recorded a goodwill impairment charge of about $9.6 billion due to deterioration in the financial markets.
The Treasury Department, which has provided a total of $45 billion to Citi, said the transaction requires no new federal funds. But it left the door open for Citigroup to seek additional government funding or for the conversion to common shares of the remaining $20 billion in federal bailout money it received late last year. The government currently holds about an 8 percent stake in Citi.
For now, that $20 billion in government funding will be converted into a new class of preferred shares that will be senior to other bank debt and it will continue to pay a yearly 8 percent cash dividend. As part of the deal, the payout for all other preferred shares will be suspended.
Citi will offer to exchange up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 per share. That's a 32 percent premium over Thursday's closing price of $2.46.
The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among the private investors that said they would participate in the exchange.
The conversion will help provide Citi the mix of capital to withstand further weakening in the economy. The stock-conversion option was laid out by the Obama administration earlier this week as an option for providing relief to banks. It gives the government greater flexibility in dealing with ailing banks. It also gives the government voting shares, and therefore more say in a bank's operations.
But common shares absorb losses before preferred shares do, which means taxpayers would be on the hook if banks keep writing down billions of dollars' worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.
On the other hand, common stock in banks is incredibly cheap, and taxpayers would reap gains if the banks come back to health and the stock price goes up.
In Washington, the Treasury Department confirmed the deal. "Treasury will receive the most favorable terms and price offered to any other preferred shareholder through this exchange," the department said in a statement.
One of the hardest hit banks by the ongoing credit crisis, Citi has also received guarantees from the government that protecting it from the bulk of losses on $300 billion of risky investments. Citi has been especially hit hard by investments in the mortgage market, which began to collapse in 2007.
The deal comes as Citi is in the process of shedding assets and cutting staff as it looks to reduce costs and streamline operations ahead of splitting its traditional banking businesses from its riskier operations. Last month, Citi reached a deal to sell a majority stake in its Smith Barney brokerage unit to Morgan Stanley.
Citi will also reshape its board of directors, Richard Parsons, the bank's chairman, said in a statement Friday. The board, which currently has 15 members, will have a majority of new independent directors as soon as possible, Parsons added.
Three board members in recent weeks have already said they would not seek re-election as the company's annual shareholders meeting in April. Two others will reach the mandatory retirement age by the time of the meeting.
Earlier this month, Roberto Hernandez Ramirez said he would not stay on beyond his current term. Last month, Robert Rubin, a former Treasury Secretary who was a longtime Citigroup board member, and Win Bischoff, most recently chairman at Citigroup, both announced their retirement from the company.
The goodwill charge announced Friday was added to Citi's 2008 results along with a $374 million impairment charge tied to its Nikko Asset Management unit. The charges resulted in Citi revising its 2008 loss to $27.7 billion, or $5.59 per share.
