US Government increase stake in Citigroup to 36%

The US Government has increased its stake in troubled bank Citigroup from 8% to 36%, the US Treasury announced on Friday.

The higher stake means the US Government has a powerful influence over the bank but the board of Citigroup have insisted that they are still maintaining day-to-day control of the bank.

The deal is subject to Citigroup raising extra private capital but does not require extra taxpayer investment.

Citigroup has been badly affected by the credit crunch and last autumn the bank had to be bailed out by the Government in a deal worth $45 billion (£32 billion), this was combined with a $306 billion guarantee for the bank’s most risky loans.

In return for the latest financial aid, Citigroup has pledged to allow the Government to restructure its board of directors so it contains a majority of independent members.

Furthermore, the Government will convert some of its preferred stock in Citigroup to common shares.

It is hoped the latest deal will reassure the markets and stabilise the bank. However, its shares, an indication of confidence in the company, continue to dive. The stock was down over 30% on Friday afternoon, well below the $2 mark - a low not seen since the early 1990s.

Last year, the bank embarked on a cost-cutting programme that saw over 50,000 jobs lost.

In January, Citigroup said it was proposing to split the firm into two separate businesses to restore profitability. Citigroup said it would separate the company, for management purposes, into two separate businesses - Citicorp and Citi Holdings.

Citicorp will manage the company’s traditional banking work, while Citi Holdings will handle the firm’s riskiest investment assets.

Discuss this in the Finance Markets forums

Story link: US Government increase stake in Citigroup to 36%