Citi deal inspires no confidence
The government's latest attempt to
prop up Citi fails to ease worries that a full-scale takeover
is on the way for it and other banks.
NEW YORK (Fortune) -- If investors have
regained confidence in the big U.S. banks, they have a funny
way of showing it.
Shares of most big banks tumbled Friday
morning after the government agreed to convert part of its
preferred-stock investment in Citigroup (
Fortune 500) to common
By swapping $25 billion of its preferred
shares for new common shares, the Treasury Department is giving
Citi a boost to a key measure of its capital cushion against
future losses -- tangible common equity.
But the move, the government's latest bid
to quell fears about the New York-based bank's health, also
dilutes existing shareholders.
That is one reason why Citi's shares
tumbled more than 30% to an 18-year low Friday. And some warn
it could still leave Citi undercapitalized compared with other
Analysts at Goldman Sachs said in a report
Friday that the conversion would raise Citi's tangible common
equity to 4.3% of total capital -- but noted that this figure
is bloated by a deferred tax asset.
Excluding that asset, Goldman said, the
ratio would be just 2% - compared with 3% at the average large
Other big banks get crushed
Wall Street was not only concerned about
Citi's future though. Investors were also worried about the
possibility of future federal intervention in the banking
sector beyond Citi.
Shares Bank of America (
Fortune 500), which like Citi
has received more than $100 billion in federal aid in recent
months, tumbled 12%. Wells Fargo (
Fortune 500) fell 7%.
The use of taxpayer funds to support
troubled financial institutions has become unpopular in
Congress, particularly in light of recent reports of the perks
lavished on some banks receiving federal aid.
Treasury Secretary Tim
Geithner and Federal Reserve chief Ben Bernanke have said
repeatedly over the past month that they want to keep the
financial system in private hands.
But with the U.S. economy in its worst
recession in at least 26 years, there is growing concern among
investors that the half-measures taken so far by the government
won't be enough to prevent a wholesale takeover of the most
With unemployment rising, problems are
increasingly spreading to the credit card and auto loan
portfolios at many banks.
Earlier this week, JPMorgan Chase
Fortune 500) - one of the
healthiest big banks - slashed its quarterly dividend by 87% in
a bid to conserve cash and add to its capital base.
Wall Street had high hopes earlier
this month that Geithner would unveil a comprehensive plan to
support banks. But the proposals he outlined were short on
details. Treasury said this week it began conducting so-called
stress tests of banks, but results aren't expected for
In the meantime, investors -- burned in
the plunge of financial stocks since the credit markets started
seizing up in August 2007 -- are staying away from the banks,
frustrating the administration's efforts to bring in private
capital to help solve the crisis.
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