U.S. News

Citigroup's Latest Rescue Plan May Still Not Be Enough

Eric Dash and Louise Story, The New York Times|The New York Times

By any measure, the federal government’s latest rescue for Citigroup is perhaps the most daring attempt yet to stabilize the nation’s beleaguered banks. But it almost certainly won’t be the last.

Colin Robertson

No sooner did the Treasury Department announce on Friday that it would increase its ownership in Citigroup than the questions began to swirl.

The big question, of course, is this: Will this plan, the third since October, be the one that finally works? Will it shore up this $2 trillion behemoth? Or is the outcome that the banks and the government are so desperately trying to avoid — nationalization, under whatever guise — only a matter of time? Wall Street’s judgment was swift and brutal.

Citigroup’s share price, which a little over two years ago was flying high at $55, plunged 96 cents to a mere $1.50.

Other banking shares also fell hard, underscoring the acute anxiety over where this will end and what the government will do next.

The latest Citigroup rescue, experts said, falls short on several fronts.

Neither the previous bailouts nor this one, which will increase the government’s ownership in Citigroup to 36 percent from 8 percent, removed the toxic assets that are at the heart of Citigroup’s problems.

At best, this third rescue may buy time to devise a solution that allays investors’ fears.

At worst, it could allow the problems to fester and eventually cost the government — and, by extension, taxpayers — even more money.

“There’s a vote here every day in the stock market,” Peter J. Solomon, the chairman of a boutique investment bank that bears his name. “The vote every day says ‘You haven’t found a plan, haven’t found a plan, haven’t found a plan.’ ”

Indeed, Citigroup itself proposed the third plan, which involves converting the government’s preferred stock in the company to ordinary common shares, as far back as November — when the second rescue was devised.

With the first two bailouts, the government provided Citigroup with $45 billion. With the third — which won’t involve additional taxpayer dollars — it will become Citigroup’s largest shareholder by far.

Yet Citigroup could still require vast amounts of added capital. It must cope with an expected wave of losses this year on all kinds of loans as the recession deepens. For the moment, it may simply muddle along.

The latest plan began to coalesce on Sunday, when the Treasury secretary, Timothy F. Geithner, alerted Vikram S. Pandit, Citigroup’s chief executive, that the government would seek to convert its preferred stock.

The move was designed to allay fears that Citigroup’s plunging stock price might prompt customers to pull money from the bank, although there is no sign that is happening now.

Federal officials did not always see eye to eye with each other, or with Citigroup.

The Federal Deposit Insurance Corporation, for instance, sought to revisit some terms of the government’s recent agreement to provide insurance on $306 billion of Citigroup’s worrisome assets to make it more favorable for taxpayers.

Treasury officials, meanwhile, suggested using Citigroup as a test case for a public-private investment fund that would purchase troubled assets from banks.

But neither policy makers nor Citigroup executives could settle on various issues, including how to value those illiquid securities — a thorny question that has perplexed both Washington and Wall Street from the start.

Along with the Treasury Department announcement, Citigroup said that it had gotten assurances from four big preferred shareholders to convert their investments into common stock.

Mr. Pandit, who will remain Citigroup’s chief executive, described the complex transaction on Friday as a “bridge to profitability.” He said the bank was committed to its remaining businesses and tried to quash the perception that the government’s influence would expand.

“We are going to run Citi for shareholders,” Mr. Pandit said in a conference call.

Investors — and even Citigroup’s own employees — have their doubts. Stockholders’ investments will be severely diluted.

And many analysts say they believe the rescue, which will allow the government to convert more shares over time, slowly increasing its stake, amounts to an intravenous drip that is keeping the bank alive.

But Citigroup’s core problem — tens of billions of dollars of toxic assets — remains.

So the government may need to convert more preferred stock, or inject more money directly.

Gary L. Crittenden, Citigroup’s chief financial officer, said in an interview that with Friday’s deal and other moves, the company has enough high-quality capital.

“We designed this with the view this would be the right amount of capital to get us through,” he said. But he did not rule out having to raise more capital, especially if Citigroup were to fail a so-called stress test that regulators are giving big banks to assess their losses.

Similar uncertainties loom over the rest of the banking industry.

Investors are struggling to sort out which banks will be able to generate enough capital on their own to avoid second or third bailouts.

“The government would clearly like to own as little of the common as possible,” said David Bullock, a hedge fund investor at Advent Capital Management. “For most, the real day of reckoning in this regard is in the future.”

Indeed, Bank of America shares fell $1.37 to $3.95 on Friday, reflecting concern that the government might convert part its $45 billion preferred investment in that bank into common stock — something the bank vigorously denies.

Other major banks, like Wells Fargo or even JPMorgan Chase, could come under pressure as well.

Robert Stickler, a Bank of America spokesman, said that the bank did not expect to have problems during the stress tests, and that its lawyers were evaluating whether the bank could rebuff the government if regulators tried to jawbone it into taking action the bank thought was unnecessary, like accepting fresh capital from the government.

Still, Mr. Stickler said, it is unclear whether Bank of America would have the legal right to refuse the government.

“I don’t think there’s any precedent here. I don’t think this has ever before been challenged,” he said.

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