Money & Investing - Banks.com

Yesterday, the stock market shuddered perceptibly as the government announced that it might take a 36% stake in Citi. Indeed, the reception of this not-quite nationalization of Citi has actually caused more jitters on Wall Street than earlier rumors of outright nationalization. And current Citi shareholders aren’t going to get much benefit from this, either. The Wall Street Journal reports on yesterday’s agreement between the U.S. governemnt and Citi:

Friday’s agreement shows how hard the Obama administration is trying to stabilize the U.S. banking industry without a full-fledged nationalization that would wipe out investors and leave the government in charge. But the deal will punish existing shareholders of Citigroup, who will see their stake diluted by 74%, and likely do little to change the awkward relationship between federal officials and management of the New York company. …

This rescue also was more palatable because the government isn’t pumping in additional taxpayer dollars. Instead, as much as $25 billion in preferred shares held by the U.S. government will be converted into common shares as Citigroup struggles to stabilize itself following more than $37 billion in net losses during the past five quarters.

In addition to increasing its stake in Citi, the government is also planning to overhaul the Board — changing the way the bank is run. CEO Vikram Pandit will remain, but the Fed has been making changes in the boardroom through pressure. However, since the government is taking preferred shares and not using taxpayer money, Citi is not being pressured to offer more loans or curb executive pay.

While it probably doesn’t pay to be a current investor in Citi right now, there is potential for future growth. If the government can manage to stabilize Citi, then it is likely that the multi-national finance juggernaut will survive this recession and thrive in the future.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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