WASHINGTON – The government on Monday moved toward dramatically expanding its ownership stakes in the nation's banks — with Citigroup, the struggling titan of the industry, apparently at the top of the list. Wall Street responded as it has with the rollout of almost every other plan to fix the financial crisis, taking a big drop and sending the Dow Jones industrials to its lowest level in a dozen years.
The Treasury Department, the Federal Reserve and other banking regulators said they could convert the government's stock in the banks from preferred shares to common shares.
The strategy, which could be applied retroactively to banks that received money in the first incarnation of the bailout, carries risks. But it avoids, at least for now, having to tap more taxpayer money or resort to full-fledged nationalization.
Citigroup Inc. — perhaps the biggest name in American banking — has approached the regulators about ways the government could help strengthen the bank, including the stock conversion plan, according to people familiar with the discussions. They spoke on condition of anonymity because they are not authorized to speak on behalf of the government or the company. A Citigroup spokesman declined comment.
The stock conversion could be available for other banks as well, the same sources said.
Regulators, reinforcing what the White House has said, insisted that keeping banks private is a priority. But federal officials are walking a difficult line because the government could still have huge stakes in banks.
On paper Citigroup is only worth about $14 billion or so. It may not make sense to throw any more money at it. Bank of America may also be in the same fix.
As Bill Kristol said on Special Report it won't do the economy any good to have these zombie banks staggering around and sucking up resources. It may be best to let the government break them up into sellable units and whatever's left.
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