Citigroup: America's Card Company

[I AM NOT THAT GUY 5,715]

Citigroup Stuck With Bernanke Offer Rival Banks Plan to Refuse

June 1 (Bloomberg) -- When financial stocks slumped in February to the lowest level in at least 17 years, U.S. Federal Reserve Chairman Ben S. Bernanke told Congress the government might end up owning “substantial” stakes in the country’s biggest banks.

Three months later, New York-based Citigroup Inc. may be the only large bank that has to accept his offer.

Bank of America Corp., Wells Fargo & Co. and seven other firms judged to need extra capital by the Fed’s “stress tests” plan to raise the required $69.1 billion through a combination of share offerings, asset sales, private securities exchanges and earnings. They will do anything to escape the government meddling that probably awaits Citigroup, said Philip Orlando, who helps manage $410 billion as the New York-based chief equity strategist of Federated Investors Inc.

“You never want to have the government involved in your business,” said Orlando, whose firm owns 7.3 million JPMorgan Chase & Co. shares and 1,483 shares of Citigroup. “They’re not businessmen; they’re bureaucrats. They don’t understand capitalism, they don’t understand the profit motive and they don’t understand the financial industry.”

Citigroup Chief Executive Officer Vikram Pandit’s plan to convert $25 billion of government-held preferred shares into a 34 percent voting stake contrasts with the negotiations that New York-based JPMorgan and Goldman Sachs Group Inc. are conducting to redeem preferred shares they sold in October to the U.S. through the Troubled Asset Relief Program.

Government Influence

“Companies that repay TARP will get out of the hottest part of the government’s heat lamp,” said Kevin Fitzsimmons, an analyst at Sandler O’Neill & Partners LP in New York. “But if you go to that next level of having to convert TARP to common, that could be a whole other level of government influence.”

Citigroup, the third-biggest U.S. bank by assets, could face stricter pay rules, limiting its ability to keep talented executives, said Jason Goldberg, a New York-based analyst at Barclays Capital, who has an “overweight” investment rating on Citigroup’s stock. The bank may have to exit risk-taking businesses that are profitable for competitors, he said. Politics also may color the Treasury Department’s votes on board members or shareholder proposals at annual meetings, said Thomas Brown, CEO of New York-based hedge fund Second Curve Capital.

Any government investment in financial institutions raises the prospect of banks being ordered to focus on “state-approved social objectives” instead of increasing earnings, according to a report last week from the Committee on Capital Markets Regulation, a 25-member group of financial-industry executives, lawyers, consultants and academics.

Citigroup Shortfall

“The investing community doesn’t welcome long-term involvement by the U.S. government in the private economy,” said Kevin Starke, an analyst at CRT Capital Group LLC in Stamford, Connecticut. “Every time I try to pitch an idea to investors that has some government involvement, the automatic reaction is, ‘I don’t want to get involved.’”

Citigroup was found by the Fed to need $93 billion more in common equity as of the end of 2008, the biggest gap among the 19 U.S. banks that underwent the stress tests.

The bank already had a plan in place to convert $52 billion of preferred shares, including the government’s, into common. It also got $29 billion of credit for first-quarter earnings and gains on asset sales, so it only needed $5.5 billion more by the time the stress-test results were announced in May. Citigroup says it will close the gap by expanding the exchange offer to $58 billion.

Stephen Cohen, a spokesman for Citigroup, declined to comment, as did Treasury spokesman Andrew Williams.

Bank of America

Bank of America, the largest U.S. bank by assets, said last week it already has gathered $26 billion, or 76 percent of the amount it needs, by issuing public shares, selling part of its holdings in China Construction Bank Corp. and converting privately held preferred shares into common.

The Charlotte, North Carolina-based company is raising $2 billion more of common equity by exchanging additional privately held preferred shares and says it won’t need government help to close the gap.

“We don’t need new government money, and we don’t intend to convert the existing TARP money we have,” Bank of America CEO Kenneth D. Lewis said on a May 7 call with analysts and investors. “In fact, our game plan is designed to help get the government out of our bank as quickly as possible.”

Banks must submit their plans to raise equity required by the stress tests by June 8 and have them approved by the Fed. The companies then have until early November to complete their capital-raising.

‘Simply Not Interested’

Wells Fargo, judged by the Fed to have a $13.7 billion equity shortfall, raised $8.6 billion through a common stock offering on May 8, a day after the stress-test results were announced. The San Francisco-based bank, the biggest on the West Coast, aims to get the rest from earnings or other non- government alternatives.

“We’re simply not interested” in converting TARP preferreds into common, CEO John Stumpf said on a May 7 conference call.

Atlanta-based SunTrust Banks Inc., told to raise $2.2 billion, plans to rely on “internal and non-governmental sources of capital,” while Fifth Third Bancorp in Cincinnati will turn to “private market alternatives” for its $1.1 billion gap, according to statements from the companies.

Even Regions Financial Corp., Alabama’s biggest bank, may have found a way out. Analysts at Fox-Pitt Kelton Cochran Caronia Waller LLC said in a May 19 note that the Birmingham- based company might put itself up for sale rather than give the government a stake. Instead, Regions Financial sold common shares and convertible preferred stock to raise almost $2.1 billion of the required $2.5 billion.

Pandit’s Predicament

“They’re pulling out all the stops, looking at any lever they can to avoid the government option,” said Fitzsimmons of Sandler O’Neill, referring to the banking industry’s capital- raising efforts.

Pandit, 52, had little choice when he agreed in late February to make the government Citigroup’s largest shareholder. The stock tumbled below $2, sparking concern that depositors might pull out and trading partners would back away.

The Treasury Department said in a Feb. 27 statement that it would convert its preferred shares into common as long as private preferred holders did the same. The condition kept the Treasury’s stake below 50 percent, avoiding the control it acquired took following last year’s takeovers of American International Group Inc., Fannie Mae and Freddie Mac.

Citigroup shares more than doubled since the conversion announcement, closing at $3.72 in New York Stock Exchange composite trading on May 29.

GMAC Stake

The Treasury insisted that Citigroup accelerate a plan to shake up its 14-member board and install a majority of new independent directors, people familiar with the matter said at the time. The government left the selection and timing of any appointees to Citigroup’s board. No changes have been announced since four new directors were named in March.

The government took a firmer stance last month with GMAC LLC, the Detroit-based auto financier that required a $13.5 billion infusion. The Treasury, which will own 35 percent of GMAC, appointed two of the company’s board members.

GMAC may be the only stress-tested financial institution other than Citigroup to end up with the government as a shareholder.

Citigroup had $36 billion of net losses during the past six quarters on mortgages, money-market instruments, credit card loans, hedge funds, derivatives, private-equity investments and loans to low-rated companies.

‘Financial Black Hole’

“If the choice is going out of business and forming a financial black hole, this is a less bad alternative,” Federated’s Orlando said.

Citigroup was the world’s largest financial institution by market value as recently as 2007. It now ranks 81st, dwarfed by Beijing-based Industrial & Commercial Bank of China Ltd. and China Construction Bank, and HSBC Holdings Plc in London, according to data compiled by Bloomberg. JPMorgan is the biggest U.S. bank, followed by Wells Fargo and Bank of America.

Citigroup’s rivals also are susceptible to government influence, as they are subject to oversight by the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. Treasury Secretary Timothy Geithner said in May 20 testimony before the Senate that a “more conservative regulatory regime” for banks was one of several reforms needed to prevent a repeat of the crisis.

‘Ax to Grind’

The government may protect Citigroup because it wants to show a profit on its investment, said Goldberg of Barclays.

“If you’re the government and you’re an equity holder, the last thing you would want to do is put the company on an uneven playing field,” he said.

Legislators may be less able to keep their hands off, said Thomas Theobald, who served as CEO of Continental Bank Corp. following its seizure in the 1980s by the FDIC. He cited a May 21 letter sent by Illinois congressmen to Geithner urging him to pressure TARP recipient Wells Fargo not to push for a liquidation of Hartmarx Corp., the ailing Chicago-based menswear maker.

“Congressmen don’t deal in details, they simply issue blasts,” said Theobald, who was a vice chairman at Citigroup predecessor Citicorp from 1982 to 1987. “If they have an ax to grind, they will.”

Cram-down Legislation

U.S. Representative Alan Grayson of Florida criticized Citigroup advertisements on the front page of the New York Times in April as “propaganda” and a potential misuse of bailout funds. The ads promoted products and services catering to consumers in a faltering economy. Citigroup spokeswoman Susan Thomson said at the time that the ads aimed to “maintain an ongoing dialogue with a highly influential readership.”

Even with the Treasury as a preferred shareholder, Citigroup has had to bow to some government demands. FDIC Chairman Sheila Bair pressed the bank in January to participate in her agency’s “mod-in-a-box” foreclosure-prevention program. Many banks are leery of the effort because foreclosures sometimes can minimize write-offs and flexibility helps when negotiating with delinquent borrowers.

Citigroup also consented to lawmakers’ demands that it support a bill giving judges the authority to write down mortgage principal for homeowners in bankruptcy. The measure, approved by the House of Representatives on March 5, faced opposition from other banks and was defeated in the Senate on April 30.

Once the Treasury has a voting stake, the bank might be pressured to tailor spending or financing decisions to suit partisan policies on the environment or labor issues, said Brown of Second Curve Capital. In recent years, environmental groups have attended Citigroup’s annual shareholder meeting to rail against financing for mountaintop strip mining.

“Who knows what will be proposed at next year’s shareholder meeting?” Brown said.

http://www.bloomberg.com/apps/news?pid=206...&refer=home