Bloggingstocks.com, 23 Feb 2009, Peter Cohan
"Now, after denying that it plans to nationalize banks, the U.S. is reportedly in discussions with Citigroup (NYSE: C) to convert its $45 billion in preferred shares -- which represents a 7.8% share -- into a 40% stake in Citi common. In the process of making this conversion, Citi will issue new common shares which will further dilute Citi shareholders.
The government's preferred shares are treated as debt for accounting purposes and by converting those shares to common, Citi can reduce its debt and increase its tangible common equity. The U.S. thinks this boost in tangible common equity will give Citi the balance sheet strength it needs to pass the stress test.
This move also puts pressure on the sovereign wealth funds (SWF) that bought Citi preferred. Should they also convert their holdings to common? These SWF investors include the Government of Singapore Investment Corp. (GIC), Abu Dhabi Investment Authority and Kuwait Investment Authority. But if GIC's $6.9 billion stake is converted into 4% of Citi common, it will give up a 7% yield on the preferred and still face the risk of dilution by the U.S."
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