The U.S. government ratcheted up its effort to save Citigroup Inc., agreeing to a third rescue attempt that will cut existing shareholders’ stake in the company by 74 percent. The stock fell 39 percent.
The Treasury Department said it would convert as much as $25 billion of preferred shares into common stock provided private holders agree to the same terms, the government said Friday. The conversion would give the government a 36 percent stake in the New York-based company.
“We’re in these dire conditions, and this is a restructuring of a troubled company,” CreditSights Inc. analyst David Hendler said. “Common shareholders are severely diluted.”
Increased government involvement complicates chief executive Vikram Pandit’s attempt to restore confidence in Citigroup after the stock sank to its lowest level in 18 years. The government is supporting the company because of concern its failure might roil global markets. The U.S. doesn’t immediately intend to inject more money after channeling $45 billion to Citigroup last year.
The bank, which last year slashed its quarterly dividend to 1 cent a share, said Friday that the payout will be eliminated. It also took an accounting charge related to the plummeting value of some businesses, swelling its record 2008 loss to $27.7 billion, or 48 percent larger than reported a month ago.
Moody’s on Friday reduced its rating on Citigroup’s senior debt to A3 from A2. Moody’s said that even after government support, the bank will emerge from the economic crisis on a smaller scale, “which could diminish its relative importance to the U.S.banking system.”
Standard & Poor’s affirmed its A/A1 rating and changed its outlook to “negative” from “stable,” citing the possibility the government may have to provide more support.
Assuming the maximum amount of preferred shares eligible for conversion, existing stockholders would be left with a 26 percent stake.
The stock fell 96 cents, to $1.50, in composite trading on the New York Stock Exchange as a record 2 billion shares changed hands. It has plummeted 90 percent in the past 12 months.
