27th 2009
From Economist.com AP
IN A matter of weeks the nationalisation of America’s banks has
gone from taboo to talking point. Politicians on both left and
right accept that America’s sickest banks may need to be taken over
and restructured and their good parts returned to private
ownership. On Friday February 27th Citigroup and the Treasury
reached a deal that took a big step towards what would in essence
be partial nationalisation. Through conversions of preferred stock
the government will end up with up to 36% of Citi, though the final
figure will depend on how many preferred shares private holders
agree to swap.
Although the government continues to resist calls for
nationalisation, its hand may be forced by the results of the
“stress tests” that it began to perform on Wednesday on the 19
largest banks. That prompted the Treasury and a
group of regulators to declare that they stood “firmly” behind the
banking system, but that their “strong presumption” was that banks
would remain in private hands. Ben Bernanke, the chairman of the
Federal Reserve, went further, saying in congressional testimony
this week that nationalisation “is when the government seizes the
bank and zeroes out the shareholders…we don’t plan anything like
that.”
Even so, the neediest banks, such as Citigroup, are heading that
way. The latest bail-out will give the government a stake of over
seven times the holding of Prince Alwaleed bin Talal, the most
influential existing shareholder—and voting power to match. As Mr
Bernanke alluded to in his testimony, the government does not need
to own a majority of the shares in a bank to wield whatever
influence it likes. With somewhere near 36% of Citi, control of
decision-making will be complete—if it is not already. As Mr
Bernanke also pointed earlier in the week, banks cannot do whatever
they like with capital they receive from the state. Citi already
has to clear strategic decisions with regulators.
Perhaps this is why the government is content to allow Vikram
Pandit, the bank’s boss, and the management team that have overseen
Citi’s slide to remain in place. But the board faces a shake-up,
with the Treasury insisting that the majority of directors be
independent. However, this too has been in the works for some time.
Dick Parsons, Citi's chairman, has been openly looking for new
board members for some weeks.
As a common shareholder, the taxpayer will be taking more risk.
Common shares take the first loss, and Citi will not be paying
dividends on them either. Whether the taxpayer will get a good deal
in return is unclear.
Citi approached regulators about the conversion, fearful of being
swamped by further losses as the recession and housing crisis
deepen. The deal marks the bank’s surrender in its battle to
persuade investors that its reasonably healthy “tier-one” ratio is
a convincing measure of capital adequacy. These days markets prefer
measures using tangible common equity, which is undiluted by hybrid
capital such as preferred stock.
Fortunes vary among America’s banks giants. No one doubts that the
sums still needed to put Citi on a sure footing exceed its current
market value of about $14 billion. The capital conversion is its
third bail-out in four months. Bank of America is also in poor
shape, thanks to its disastrous purchase of Merrill Lynch and its
heavy exposure to enfeebled consumers. JPMorgan Chase, the
healthiest of the big banks, is nevertheless taking no chances. It
cut its dividend this week to save $5 billion in equity. It said
this was a precaution, in case conditions worsen dramatically. If
that is the case the government may end up repeating this
process.
