Government To Buy Citibank Shares

The U.S. government has promised to buy up to 36 percent of Citigroup's common shares in its latest effort to help the troubled bank. But the government isn't calling it "nationalization." Under the terms of the deal, Citigroup has to find private investors who will convert their preferred stock to common shares.

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ALEX COHEN, host:

This is Day to Day. I'm Alex Cohen.

MADELEINE BRAND, host:

And I'm Madeleine Brand. The government has agreed to take a much bigger stake in Citigroup. Here to talk about the latest deal is NPR financial correspondent Yuki Noguchi. And Yuki, what has the government agreed to do for Citi?

YUKI NOGUCHI: Well, it's basically a switch. The government is switching one type of less risky preferred shares for more risky common shares in the bank, and in doing so, they'll take a larger stake, from about eight percent that it currently holds to about 36 percent. Now, the government isn't actually giving the bank more money. What it's doing is enabling its capital base to be bigger, and that capital base has been suffering for a number of reasons. You know, for one thing, its share price has been under pressure, and it also lost a lot of money last year.

BRAND: Right. So, it's converting the preferred stock that it already owns into what's called common stock. What does that mean?

NOGUCHI: Well, what it means is a different class of shares. I mean, preferred shares are usually - you can recover more if a bank were to, say, fail or go into bankruptcy. But a common share is, you know, a more risky form. It's a pretty traditional form of just owning a share of a bank.

BRAND: So, why is that a good deal for the taxpayers?

NOGUCHI: Well, it's a good deal because, for one thing, I mean, the government is trying to stabilize a major bank, and so far, you know, the government programs haven't been able to do that. The other thing is it's a way of not committing any additional money. I guess you could also say that if Citigroup shares eventually rise, then taxpayers could actually stand to make money off this deal. But again, the real goal here is stability, and you know, the thinking is that if the government invests, maybe other investors will also be attracted to this investment.

BRAND: Well, how much faith is there that this will actually work?

NOGUCHI: There's no question that if it does, then other banks will be probably looking to do a similar deal, so you'll see more of these kinds of deals. But you know, keep in mind that the economy is in a protracted and deepening recession, so there's no guarantees that this is going to do the trick. So, the administration is doing these stress tests on banks in the next couple of weeks to assess their viability and see what else they might have to do to shore them up. But the government is already planning to spend more than $1 trillion to stabilize financial institutions, and so far, most would say that hasn't worked. I mean, you can look at the banks, AIG or Fannie and Freddie and they're still in shaky condition.

BRAND: NPR's Yuki Noguchi, thank you.

NOGUCHI: Thank you.

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