Nationalization

by Larry Levin


Last week there were all sorts of nationalization rumors and denials. From this evening's news, it is looking like the rumors may become fact. Citigroup is actually asking the government to take over a large part of the bank - asking to be quasi-nationalized.

Citigroup is pressing the US government to agree on a new capital injection that would increase the authorities' stake in the troubled bank to about 40 per cent but stop short of an outright nationalization.

The talks come after Citi's shares slumped last week as investors feared it would be nationalized. Citi insiders said they expected a decision on the company's future in the coming weeks but warned that it would have to come earlier if its shares fell again in the next few days.

People close to the situation said Citi executives had been in discussions with regulators during at the weekend over a plan that would enable the government and other shareholders to convert up to $75bn of preferred shares into common stock.

According to its proponents, the injection of common stock would bolster Citi's capital base while at the same time allaying market fears of a nationalization. Under the plan, first revealed by the Financial Times last week, Citi could also try to raise fresh equity with a public share offering. The aim would be to keep the government stake to no more than 40 per cent or at least below 50 per cent, said people familiar with the plan.

People familiar with the plan said it would hinge on the price at which the government and other shareholders, which include sovereign wealth funds and Prince Al Waleed, convert their shares as well as how many of its $45bn-worth of shares the government converts.

However, the US Treasury has so far not expressed an opinion on the idea and it is unclear whether the government would agree to convert its preferred shares into Citi's common shares without demanding a controlling stake.

Top Government Officials - who are trying to establish seeking a want a more strategic and less ad hoc response to the crisis - were and are anxious to avoid if possible the type of Sunday night crisis announcement that became a staple for Hank Paulson for's crisis management at the Treasury last year.

They apparently believe that the market response to White House and Treasury statements on Friday reaffirming the administration's commitment to private ownership of financial institutions buys them some time to come up with a way forward.

The Treasury said secretary Tim Geithner would "preserve a financial system that is owned and managed by the private sector".

Citi declined to comment. The Treasury was not available to comment.

The authorities indicate a strong preference for supporting banks in private markets wherever possible - not least because of the potential international disruption that could ensue if a large global bank failed. But Treasury did not rule out nationalization in all circumstances.

Most analysts believe that even if the authorities reject full nationalization of Citi via the Federal Deposit Insurance Corporation the government will end up taking a substantial stake in the bank.

Private sector executives and foreign government officials complain that Treasury is still not staffed up with enough mid and senior level officials to develop and communicate policy at the pace required by the crisis.



Previous Day's Trading Room Results:

Trade Date: 2/20/09

E-Mini S&P Trades*
(before fees and commissions):


1) OTF sell @ 11:00am at 764.50 = -2.00

2) Algorithm positions (3)...combined SofT and Algo total...0.00 (b/e)


Electronic (YM) Mini-Dow:


1) No trades today



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