CNBC Citi, US Reach Deal to Convert Government Stake

By: CNBC.com | 26 Feb 2009 | 11:44 PM ET
Citigroup and the U.S. have reached a deal to give the government a bigger stake in the troubled banking giant, by converting its preferential shares to common stock, a Treasury official tells CNBC.The Treasury official said the government will be offered the lowest price given to any private investor, to convert preferred shares into common equity. The Treasury will match the private investors' conversions dollar-for-dollar up to $25 billion. It currently holds about $45 billion worth of preferred stock purchased through two separate capital injections.

Private investors that have bought preferred shares of Citigroup include the Government of Singapore Investment Corp., the Abu Dhabi Investment Authority and the Kuwait Investment Authority.Citi already has agreement from some private investors to convert preferred shares into common, according to one person familiar with the transaction, but it's unclear if the amount is equal to the full $25 billion of preferred that the government is willing to convert on a matching basis with private investors.

The conversion should see the Treasury's Citi stake rise to between 30 to 40 percent. The government is also demanding a boardroom shakeup as part of the agreement. The exact details of this shakeup are not known. However, CEO Vikram Pandit is expected to keep his job under the agreement.

The deal, expected to be formally announced later Friday, also stipulates that Citigroup must undergo a bank stress test. Other key details of the Citigroup-U.S. pact remain unclear.

As previously discussed -- when comparing Citigroup's market capitalization with the number of preferred shares the government currently owns -- if these shares were converted right now to common stock, they would worth more than 100 percent of Citi's total market capitalization.

Any additional money that Citi receives from the government automatically means a further stock dilution. While Obama Administration officials say this isn't nationalization, markets may interpret the situation differently and see it as de facto nationalization.

The agreement is likely to make the U.S. government the biggest shareholder of Citigroup, owning a majority of its stock. This is de facto government ownership, or nationalization.

o Get After-Hour Quotes for Citigroup