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Government shifts strategy in strengthening banks

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.

The Treasury Department, 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.

Meanwhile, the government's boldest rescue to date, a $150 billion commitment for the insurer American International Group, is foundering. AIG indicated Monday it is negotiating for tens of billions of dollars in additional assistance as losses have mounted.

Citigroup — 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. A Citigroup spokesman declined comment.

Citigroup stock rose about 10 percent Monday, its first gain in eight days.

The stock conversion could be available for other banks as well, said the same sources, who spoke to the Associated Press on the condition of anonymity because the discussions are ongoing.

Regulators, reinforcing what the White House has said, insisted keeping banks private is a priority. But federal officials are walking a difficult line because the government could still have huge stakes in banks.

Citigroup already has received $45 billion in bailout money, plus guarantees to cover losses on hundreds of billions of dollars in risky investments.

"What we are doing here is we're creeping our way toward nationalization," said Terry Connelly, dean of Golden Gate University's Ageno School of Business.

The conversion plan would give the government greater flexibility in dealing with ailing banks. It would give the government voting shares and more say in a bank's operations.

But common shares absorb losses before preferred shares do, which means taxpayers would be on the hook if banks keep writing down billions of dollars' worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.

On the other hand, common stock in banks is incredibly cheap, and taxpayers would reap gains if the banks come back to health and the stock price goes up.

It is also far from clear whether the Obama plan would entice private companies to step forward and invest in banks.

The conversion plan would eliminate the 5 percent dividend that banks already receiving bailout money are currently paying the government on its preferred shares, allowing the banks to hold on to more cash.

It also could bring banks closer to the mix of capital that the government will want to see when it starts conducting its "stress tests" on Wednesday to determine the health of banks, experts said.

Government shifts strategy in strengthening banks 02/23/09 [Last modified: Monday, February 23, 2009 11:11pm]
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