NEW YORK (Reuters) - The Treasury Department announced on Friday that it will convert a significant share of the preferred stock it holds in struggling bank Citigroup Inc to common stock as long as others also do so.
In an early-morning announcement, Treasury said it would convert dollar-for-dollar its preferred shares to match conversions by private preferred holders in a bid to strengthen Citigroup’s capital base.
Citigroup shares were down 29 percent in electronic pre-market trading, reversing an initial gain, and other banking shares also slid, with the Financial Select Spider ETF down 2.8 percent.
The following is reaction from industry analysts and investors:
MARC PADO, U.S. MARKET STRATEGIST, CANTOR FITZGERALD & CO. TECHNICAL ANALYST, SAN FRANCISCO
“This is still in preparation for the Treasury coming out for their asset purchase plan... the third leg of the stool.
“However they do this, whenever they get around to telling us how they do this, I think that will be somewhat a bottom for the banks. For Citi, specifically, because it’s another AIG dramatic situation, but for all the banks that are following Citi down, it’s about the dilution that common shareholders are going to take.
“I think that Citi, like AIG, as things unfold we find out they’re in more trouble than they let on, therefore the dilution is more. While it’s not good for Citi holders today, maybe the impact on the rest of the banks should not be so severe as the market is reacting at the moment. All of this is because we don’t know what the assets are worth. Until we do, nobody can make a real true assessment of where the banks stand.”
KEITH DAVIS, RESEARCH ANALYST, FARR MILLER & WASHINGTON IN WASHINGTON, DC
“I really don’t think the (goodwill charge) is a big issue...the Tier 1 won’t change, what will change is the tangible common equity ratio and that’s what everyone’s looking at.”
“There’s no new money coming in, what you get is more common tangible equity support and that’s what everyone wants to see, that’s the buzzword...Will it be enough? I have no idea, but if you look at all the analysis...Citi was the least-well capitalized of all the banks.”
GARY TOWNSEND, CHIEF EXECUTIVE OFFICER, HILL-TOWNSEND CAPITAL, CHEVY CHASE, MARYLAND
“The one change is the requirement that existing private preferred holders need to convert...I think it’s really not very surprising given the circumstances, even though there had been a government guarantee (of a portfolio of debt)...There seems to be at least a change in what the government says one time and what it might say at a later time, but this is a brave new world.”
“(The board changes are) overdue. What will be interesting here is the degree to which the government will direct who is on the board.”
“It may not mean anything for the other banks, but if other banks need to have their preferreds converted, it suggests that other preferred holders are likely to be converted along with them.”
PETER KENNY, MANAGING DIRECTOR AT KNIGHT EQUITY MARKETS IN JERSEY CITY, NEW JERSEY
“We are talking about a form of nationalization, and to the extent that the market is going to accept it, we shouldn’t see much of a downdraft in the equity market.
“The problem is that there is so much going on in terms of trying to manage the continuing and unfolding drama around the credit crisis. Bottom line- its not like the government has much of a choice. Citi wasn’t negotiating, the government was saying, ‘This is what you have to do.’
“The government didn’t want to have to take anymore than it had to. This is the least they can do, and the most they can do without causing a wholesale sell-off.
“I don’t think this is good news. But I haven’t heard good news in 24 months. I don’t think I’m going to for a lot longer than that.”