THE EVENT: Citigroup Inc. (C) Friday took steps to convert $52.5 billion in preferred shares - including up to $25 billion held by the U.S. government - into common equity. Citi would gain much-needed capital, but that would wipe out nearly three-quarters of existing shareholders' stake.
Citi's shares hit their lowest level since November 1990, pulling banking stocks lower and the broader market into the red.
WHAT IT MEANS: Washington has to come to the aid of Citi for the third time since October. The move acknowledges that more than $50 billion in government capital and a backstop on more than $300 billion in troubled Citigroup assets haven't been enough to stop the bank's slide.
This latest bailout also indicates that the once-reliable financial sector has become increasingly unsteady, with ever-changing rescue plans confounding investors.
"We all thought we had the game plan from the government just a couple days ago," said Anton Schutz, manager of the Burnham Financial Services Fund. "We can't do our job because they keep changing the rules."
THE DETAILS: Citigroup wants to convert up to $25 billion of the government's preferred stock and nearly $27.5 billion of preferred stock in private hands.
The exchange, if fully executed, would leave the government with 36% of Citigroup's shares; existing shareholders' stake would decline to 26%. Chief Financial Officer Gary Crittenden told the Fox Business Network that he expects the stock swap to be complete by mid-April.
The Treasury will convert preferred stock into common shares only if other preferred-stock holders also do so. Several large overseas holders of preferred shares already have agreed.
The conversion rate for swapping the preferred stock to common shares is $3.25, a 32% premium to Thursday's closing price.
CITI EXECS SPEAK OUT: Crittenden and Chief Executive Vikram Pandit reassured investors that the bank's capital is strong enough to get through the financial crisis. However, Crittenden said Citigroup received no word on whether the stock switch would let Citi pass the Obama administration's "stress tests" for future government aid. The "stress test" requires certain capital ratios.
Crittenden said it was unclear how much the company would save by not paying dividends on preferred shares. The company simultaneously suspended its dividend on common shares, which recently had been slashed to 1 cent.
CITI BOARDROOM MOVES: Amid the tumult, Pandit is expected to keep his job. Citigroup's board, which has 15 directors, soon will include a majority of new independent directors. Citi Chairman Richard Parsons said five seats will be opening up. With such a large share of common equity, the U.S. government can have a bigger voice in the company's operations.
Parsons has been scrambling to lure new directors. Two candidates Citigroup approached rebuffed the overtures, people familiar with the matter told the Wall Street Journal.
The company plans to record $10 billion in write-downs for the fourth quarter, boosting the full-year 2008 net loss to $27.7 billion.
MARKET REACTION: Shares of Citigroup recently declined 37% to $1.57. Other banking stocks were also down, notably Bank of America Corp. (BAC), off 18%. Analysts have said the bank, which has received massive federal aid, might be another weak link in the ailing financial system.
The Dow Jones Industrial Average dropped 26 points to 7156, the S&P 500 declined 6.7 points to 746, and the Nasdaq Composite fell 1.6 points to 1389.
Citigroup's senior bonds are performing better, with estimates on the drop in risk premiums over comparable Treasury yields ranging from 15 basis points to 20 basis points. The annual cost of protecting Citi's senior bonds against default for five years, a key gauge of creditworthiness, dropped by $35,000 to $360,000.
"This places a significant layer of common equity below you, with a government who appears to be interested in keeping the institution afloat," said a corporate bond portfolio manager.
The annual cost of protecting the riskier subordinated debt slipped by about $129,000 since Thursday to about $610,000, according to data from Phoenix Partners Group and Markit.
For more coverage, please see:
=Citi To Give US 36% Stake In Effort To Boost Equity
=GIC Converts Preferred Citi Stock Into Common Shares
=Eurobonds: CDS Indexes Widen Sharply After Citigroup Deal
=Bond Investors Like Citi Plan So Far But Remain Uncertain
=Citi:No Guidance From Regulators On Common Equity Ratio
Citi CFO: To Realize Some Savings In Switch From Pfd Shrs-CNBC
Citi CFO: Pfd Hldrs Exchange Offer Likely Completed By April-FBN
=In Latest Citi Rescue, Govt Spooks Investors With New Shift
=IN THE MONEY: Dilution Is Rock,Loss A Hard Place For Citi Stk
(Compiled by Lisa Reynolds, Dow Jones Newswires; 201-938-5138; email@example.com)