Citigroup's Latest Bailout Gives the US More Control

The US government agreed to boost its stake in Citigroup to as much as 36%, shoring up the bank's capital and taking on far more control of the ailing banking giant.

The government will convert up to $25 billion in preferred shares to common stock in its third attempt to prop up Citigroup in the past five months.

Existing shareholders will see their ownership of the bank fall as low as 26 percent. The government stake is now close to 8 percent.

While the latest rescue does not inject more money into Citigroup, it gives the government more of a voting stake and far greater influence over the bank's operations, short of outright nationalization.

Shares of Citigroup fell to a new 18-year low on Friday.

"The government is the new boss," said Mike Holland, the founder of money manager Holland & Co in New York. "Every major decision is something that is not going to come out of Park Avenue, but is going to come from Washington, D.C."

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Citigroup in October and November received $45 billion of taxpayer money, as well as a government backstop to cap losses on $301 billion of toxic assets.

The bank will shake up its board and install a majority of new, independent directors. Five of the board's 15 members are either not standing for reelection or will reach retirement age by Citigroup's annual meeting in April.

"Investors want to see heads roll because they're so angry at the entire banking industry," said Marshall Front, chairman of Front Barnett Associates LLC in Chicago, which invests $500 million. "But Citigroup management is as well qualified to deal with the problems the bank faces now as anyone, and would not have the learning curve that new people would face."

Front said the drop in the stock was not steeper because "the stock long ago discounted substantial dilution, which is now being formally recognized."

Friday's agreement calls for Citigroup to offer to exchange common stock for up to $27.5 billion of its preferred shares at $3.25 per share. The government will match the exchange up to $25 billion, provided private investors do the same. Citigroup will halt dividends on preferred and common stock.

The agreement may be a template for other lenders that have taken government money.

It will boost Citigroup's tangible common equity ratio, a measure of capital, to between 5.4 percent and 8.1 percent from the fourth quarter's 3 percent.

On a conference call, Chief Executive Vikram Pandit said senior executives "completely remain in charge" of day-to-day operations.

Shares of other lenders also fell, including Bank of America and Wells Fargo .

In an exclusive interview with CNBC, Citigroup Chairman Dick Parsons said there was no time frame for naming new directors. He also said that management has its "arms around" the situation and that the Obama administration has the right perspective on the financial crisis.

Separately, Citigroup said it has recorded more than $8.9 billion of charges to write down goodwill and its Nikko Asset Management unit in Japan. The charges boost its fourth-quarter loss to more than $17.2 billion, and Citigroup's full-year loss to $27.7 billion.

Citigroup and other large U.S. banks will soon undergo "stress tests" to assess their ability to cope with a severe recession, and whether they might need more capital.

Referring to the new rescue, Pandit said, "This capital should take confidence issues off the table, even in a stressed environment."

Asked about nationalization, he added, "This announcement should put those concerns to rest."

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The Obama administration has said it prefers to keep banks in private hands, and Federal Reserve Chairman Ben Bernanke this week rejected 100 percent government control of lenders.

The United States already has a nearly 80 percent stake in insurer American International Group , while the British government owns 70 percent of Royal Bank of Scotland Group.

"There is so much going on in terms of trying to manage the continuing and unfolding drama around the credit crisis," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

At Citigroup, he said, the government "didn't want to have to take any more than it had to."

Pandit has split Citigroup into two: Citicorp, which has retail banking and other businesses that Citigroup wants to keep, and Citi Holdings, which includes troubled or underperforming assets it wants to sell or wind down.

A higher government stake could complicate Citigroup's ability to operate in some of the more than 100 countries where it has businesses.

Bank executives downplayed speculation that Citigroup might shed all or part of its ownership of Grupo Financiero Banamex, Mexico's second-largest bank.

"We're not open to the idea of offloading assets that we really want to keep," Edward "Ned" Kelly, head of global banking and Citi Alternative Investments, said in an interview.

"Banamex is a very important property to us, and we are intent on retaining it and maximizing its value." He also called the bank's Handlovy business in Poland "an extraordinarily important franchise to us." Citigroup said the exchange could boost its share count as high as 21 billion from 5.5 billion now.

It said investors including Saudi Prince Alwaleed bin Talal, Singapore Investment Corp, Capital Research and Management and others have agreed to swap their preferred stock.

The bank once had a market value about $270 billion. At its low on Friday, the value was below $9 billion.

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—Reuters contributed to this report.

© 2009 CNBC