Treasury, Citigroup Discuss Partial Takeover; Nationalization Fears Hit Stocks

Article excerpt

Byline: Patrice Hill, THE WASHINGTON TIMES

The federal government is negotiating a deal with Citigroup that may expand its ownership share to the point that it effectively nationalizes the nation's third-largest bank.

The Treasury and bank regulators sought to reassure investors Monday by pledging to stand behind Citi and other major banks, outlining a new strategy of allowing banks to convert Treasury's preferred stock in the banks to common shares. The move boosts bank capital without having to invest more taxpayer money, but also gives the government substantial ownership of the firms - raising the specter of nationalization.

The Treasury statement temporarily spurred sagging bank shares Monday morning - particularly those of Citi and Bank of America. The stock downdraft accelerated midday after the Standard & Poor's 500 Index broke through an 11-year low set on Nov. 20 and fell to its lowest level since April 1997. The Dow Jones Industrial Average ended down nearly 251 points at 7,114, its lowest close since May 1997.

Nationalization is already beginning, despite the Obama administration's strenuous attempts to prevent the slide toward government takeover of major banks, said Joseph Brusuelas, an analyst at Moody's Economy.com. He said none of the big money-center banks like Citi and Bank of America seems likely to pass a rigorous stress test that Treasury plans to impose. The negotiations with Citigroup show that the New York bank may have already accepted the likely outcome.

Negotiations with Citigroup center on whether the government will take as much as 40 percent ownership of the bank or as little as 25 percent through conversion of preferred shares into common shares. A 40 percent stake would make the government by far the bank's largest shareholder, and most analysts consider that to be effective nationalization. Some say the government crosses that threshold at 25 percent.

For weeks, the administration and Congress have been exercising effective ownership of banks by dictating what executive compensation will be allowed and even instructing Citi not to take delivery of a corporate jet it ordered during its salad days.

The question of whether to nationalize banks has come and gone. De facto nationalization of a portion of the banking industry is already under way, Mr. Brusuelas said. No one but the government is willing to step forward and give the banks the money they need to survive an onslaught of rising loan problems, he said.

Britain and several other European countries already have nationalized some of their biggest banks, and the United States in September took control over three of its largest financial institutions - Fannie Mae, Freddie Mac and American International Group, once the largest insurer. But it would be unprecedented for the federal government to take over a private bank, something that did not occur even in the depths of the Great Depression when thousands of banks were failing. …