As ‘nationalization‘ appears to be the U.S. government’s answer to saving the banking industry, the banks themselves are doing all that they can to boost shareholder confidence.
The latest news from Citibank is that they have approached the US government to agree on a new capital injection that would increase their stake in the troubled bank to about 40 per cent but prevent an outright nationalization.
According to this morning’s FT the U.S. government has a strong preference for supporting banks in private markets wherever possible because of the potential international disruption that could ensue if a large global bank fails. But Treasury did not rule out nationalization in all circumstances. The situation is obviously unlike that of Lehman Brothers which the authorities were quite willing to let falter despite international implications.
The move would allow Citigroup to write off some of its existing debt and raise the amount of common stock. While this could translate to happier investors on one hand (because of a larger portion of common stock requirement when details of the new stress test are announced this week), it would also dilute existing Citigroup stockholders significantly.
No final decision has been made.
Time to call a foreign friend? Or reach for a government lifeline?
According to the New York Times,
“Citigroup also hopes to persuade other private holders that bought preferred shares – including foreign government investment funds like the Abu Dhabi Investment Authority, the Government of Singapore Investment Corporation, and the Kuwait Investment Authority – to participate by converting some of their stakes into common equity.”
Is it time to call a (foreign investor) friend? Or reach for yet another lifeline to the federal government? One thing is for sure, it is unlikely that foreign investors are likely to participate until they know the U.S. government’s position.
And if Citibank does not sell out to the Fed, then it looks like it will follow the path of other banks by selling out to foreigners. Can any American bank survive survive this mess?
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