THE EVENT: Citigroup Inc. (C) Friday took steps to convert $52.5 billion in preferred shares - including up to $25 billion held by the U.S. government - into common equity. Citi would gain much-needed support, but the move would wipe out nearly three-quarters of existing shareholders' stake. Citi's shares responded by hitting their lowest level since November 1990, pulling banking stocks lower and the broader market into the red. WHAT IT MEANS: Washington has to come to the aid of Citi for the third time since October. The move acknowledges more than $50 billion in government capital and a backstop on more than $300 billion in troubled Citigroup assets haven't stopped the bank's slide. Ever-changing rescue plans also are confounding investors in the unsteady financial sector. "We can't do our job because they keep changing the rules," said Anton Schutz, manager of the Burnham Financial Services Fund. THE DETAILS: Citigroup wants to convert up to $25 billion of the government's preferred stock and nearly $27.5 billion of preferred stock in private hands. The exchange, if fully executed, would leave the government with 36% of Citigroup's shares; existing shareholders' stake would decline to 26%. The conversion rate: $3.25 or a 32% premium to Thursday's closing price. CITI EXECS SPEAK OUT: Chief Executive Vikram Pandit and Chief Financial Officer Gary Crittenden reassured investors the bank's capital is strong enough to get through the financial crisis. However, Crittenden said Citigroup received no word on whether the stock switch would let Citi pass the Obama administration's "stress tests" for future government aid, which require certain capital ratios. SAVINGS FROM SWAP?: Crittenden said it was unclear how much the company would save by not paying dividends on preferred shares. The company simultaneously suspended its dividend on common shares, which had been slashed to 1 cent. CITI BOARDROOM MOVES: Citi Chairman Richard Parsons said at least five seats on the board of directors will be opening up and the board will be "reconstituted" to have a majority of independent directors. With such a large equity stake, the U.S. government can have a bigger voice in the company's operations. The company also plans to record $10 billion in write-downs for the fourth quarter, boosting the full-year 2008 net loss to $27.7 billion. MARKET REACTION: Shares of Citigroup closed down 42.68% to $1.41. Other banking stocks also closed down, notably Bank of America Corp. (BAC), off 25.75%, partially on fears the bank might be another weak link in the ailing financial system. The Dow Jones Industrial Average closed down 115.25 points to 7066.83, the S&P 500 declined 17.45 points to 735.38, and the Nasdaq Composite fell 13.63 points to 1377.84. The Citigroup news added to the "aura of doom and gloom," for crude oil futures, according to MF Global analyst Mike Fitzpatrick. Frontmonth light, sweet crude settled down 46 cents at $44.76 a barrel. Analysts said U.S. government bonds would have fared worse Friday had it not been for uncertainty in the equities markets, sparked by Citi. The lack of confidence sent cash into what became a mixed Treasurys market, with the two- and five-year ending up and the 10- and 30-year ending down. Citigroup's senior bonds are performing better, with estimates on the drop in risk premiums over comparable Treasury yields ranging from 15 to 20 basis points. Citi senior debt credit default swaps - the cost of insuring bonds against default - dropped by $35,000 to $360,000. Citi's five-year notes due 2014 were quoted at 945 basis points in late day trading, better by 185 basis points. "This places a significant layer of common equity below you, with a government who appears to be interested in keeping the institution afloat," said a corporate bond portfolio manager. The credit default swaps on Citi's riskier subordinated debt slipped by about $129,000 since Thursday to about $610,000, according to data from Phoenix Partners Group and Markit. For more coverage, please see: =Citi To Give US 36% Stake In Effort To Boost Equity =GIC Converts Preferred Citi Stock Into Common Shares =Citi Plan Leaves Bond Investors Uncertain =Moody's, S&P, Cut Preferred Stock Ratings On Citigroup >C =Investors Buy Citi Preferred, Sell Common In Arbitrage Play =Citi Execs Hope Equity Shift Finally Satisfies Investors =Eurobonds: CDS Indexes Widen Sharply After Citigroup Deal =Bond Investors Like Citi Plan So Far But Remain Uncertain =Bank Sector Tumbles As Investors Worry Who's Next Citi Chmn Parsons: No Timetable For Picking New Dirs -CNBC Banamex Says Citigroup Deal Consistent With Mexican Law =Citi:No Guidance From Regulators On Common Equity Ratio Citi CFO: To Realize Some Savings In Switch From Pfd Shrs-CNBC Citi CFO: Pfd Hldrs Exchange Offer Likely Completed By April-FBN =In Latest Citi Rescue, Govt Spooks Investors With New Shift =GETTING PERSONAL: Citi's Move Highlights Risks Of Pfds =IN THE MONEY: Dilution Is Rock,Loss A Hard Place For Citi Stk =IN THE MONEY: Citi Trust Preferreds To Keep Distributions >C IN THE MONEY: Conversion May Not Haunt All TARP Banks =OPTIONS REPORT: Traders Forced To 'Take Action' In Fincls CREDIT MARKETS: Citi, GDP Data Cause Market Commotion (Compiled by Lisa Reynolds and Christina Myer, Dow Jones Newswires; 201-938-5138; lisa.reynolds@dowjones.com)
