By David Lawder
WASHINGTON (Reuters) - The U.S. government committed to holding up to 36 percent of Citigroup's common shares in a deal to bolster the fallen financial giant's capital base, and gave most of the bank's board their marching orders.
The U.S. Treasury agreed to convert up to $25 billion in government-held preferred shares in the bank to common equity, provided private investors contribute an identical sum, in the third major aid package for Citigroup since mid-October.
The transaction, which will not increase the government's investment in the bank, sent Citigroup's share price sharply lower in premarket trade on Friday and sent U.S. index futures to session lows.
Citigroup said that, based on full conversion, the government would hold around 36 percent of its common shares.
Major investors including Government Investment Corp of Singapore had agreed to participate in the exchange, the bank said, adding that it would take a fourth quarter goodwill writedown of $9.6 billion.
It would offer to exchange common stock for up to $27.5 billion of its preferred stock, carrying an annual coupon of 8 percent and a conversion price of $3.25 per share, and would suspend dividend payments on both classes of share.
The board unanimously decided on a reshuffle that would leave independent directors in the majority and hoped to announce new appointees as soon as possible, the bank said.
By 7:30 a.m. EST, Citibank shares had slumped 19 percent in premarket trade. Europe's banking sector extended losses to 4.3 percent after the news.
U.S. index futures hit session lows, hit by the news and the upcoming release of economic data, which could show the U.S. economy contracted by more than initially reported in the fourth quarter.
SUPPORT PACKAGE
The agreement followed more than a week of negotiations between the Treasury and Citigroup, once the world's largest financial services group.
President Barack Obama's administration signaled broad support for the nation's banks this week, with a fiscal 2010 budget plan including a "placeholder" provision for the Treasury to buy $750 billion more in securities from the bank sector.
On Wednesday, the U.S. Treasury pledged to provide sufficient capital to about 20 of the largest U.S. banks that undergo a "stress test" to assess their ability to cope with the possibility of a worse-than-expected recession.
Citigroup would be subject to that stress test, the Treasury said on Friday.
Banks judged to need more capital will have six months to raise funds from private investors or accept the Treasury's offer of buying preferred shares convertible into common equity.
The Treasury also will allow other banks that previously received capital injections under the $700 billion bailout program to convert those preferred stock investments to convertible preferred shares and later to common equity to help boost capital ratios.
For a graphic on Citi's decline, click on: https://customers.reuters.com/d/graphics/MKT_CITI0209.gif
(Additional reporting by Saeed Azhar and Kevin Lim in Singapore and Rafael Nam in Hong Kong; writing by John Stonestreet; editing by Dan Lalor)
