Buying more of Citigroup
Normally having a large minority stake in a bank is not a smart investment. The majority can put your money at risk and you have little say in how they do it. In this case it appears that the government has negotiated substantial say in how the bank will operate going forward. Time will tell whether they will be a good thing or not. Judging by Obama's magic budgeting I would not want to bet on it at this point.
Embattled Citigroup Inc. and the U.S. have reached an agreement in which the government will substantially increase its stake in the bank and in return will demand a boardroom shakeup, according to people familiar with the matter.
Under a deal expected to be announced early Friday morning, the Treasury Department has agreed to convert some of its current holdings of preferred Citigroup shares into common stock. The government will convert its stake only to the extent that Citigroup can persuade private investors to do so alongside the government, the people said. The Treasury will match the private investors' conversions dollar-for-dollar up to $25 billion.
The size of the government's new stake will hinge on the amount of preferred shares that private investors, including sovereign wealth funds, agree to convert into common stock. The Treasury's stake is expected to rise to 30% to 40% of Citigroup's shares, the people said.
As a condition to the agreement, which is designed to ease investor jitters about the adequacy of Citigroup's capital base, the government is demanding that the New York company overhaul its board of directors, the people said. Treasury will call for Citigroup's board to be comprised of a majority of independent directors.
The banks got in trouble because they did not make a correct analysis of the risk involved in certain financial instrument. But the risks that the Obama administration is making on energy, health care, taxes, spending and other items in the proposed budget dwarf the risk taken by the bank and there is no entity to bail out the government but taxpayers. Taxpayers are actually in a worse position than minority shareholders of a bank who can at least sell their shares and get out.
At the heart of the failure of the risk analysis of the banks were assumptions that proved invalid. The same will now be said about the Obama budget assumptions that are more wildly unrealistic than one that people would pay their mortgages.