US and UK Increase Stakes in Banks

by Chris Sturr | February 27, 2009

From Reuters, again:

Governments tighten grip on banksFri Feb 27, 2009 11:55am EST Reuters
By Steven C. Johnson
NEW YORK (Reuters) Governments on both sides of the Atlantic moved to tighten their grip over banks on Friday to stem a financial crisis that has pushed the U.S. economy into its deepest contraction in more than a quarter century.

U.S. stocks sank to a 12-year low after Washington struck a deal in which it could end up with more than a third of crisis-hit Citigroup. The World Bank and other development banks launched a $32 billion lending plan to help east European banks and businesses survive a deepening recession.

Citigroup (C.N) shares tumbled some 30 percent after the U.S. Treasury struck a deal to convert $25 billion of its preferred stock to common shares, which could give it a stake of up to 36 percent in the bank by diluting existing investors.

While the government will not add to the $45 billion it has already invested in what was once the world’s largest bank, the stock conversion will shore up the most conservative gauge of the bank’s health.

The U.S. government is struggling to shore up its banks as part of its approach to restoring growth. Data showed the U.S. economy shrank a staggering 6.2 percent in the last three months of 2008, its biggest slide since the first quarter of 1982, as exports fell and consumers cut spending.

“The fear is the government having a big stake in the company will create obstacles for Citigroup to be competitive, and there remain questions about the viability of the financial system,” said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.

“The (gross domestic product) number,” he added, “just threw gasoline on the fire.”

Across the Atlantic, investors were eyeing Lloyd’s Banking Group (LLOY.L) as the second major British financial firm lining up to tap a government-backed insurance scheme.

The bank, which revealed a 10 billion pound ($14.28 billion) loss for 2008, said it had not finalized a plan yet but said talks with the UK government were “well advanced.”

On Thursday, Britain agreed to insure 500 billion pounds ($715 billion) of risky bank assets and struck a deal that could raise the government holding in Royal Bank of Scotland (RBS.L) to 95 percent.

Global development banks also launched a two-year plan to lend up to 25 billion euros to shore up troubled banks and businesses in eastern and central Europe.

The crisis has dried up credit and capital flows into the once-booming region, pressuring exchange rates and forcing some countries to seek help from the International Monetary Fund.

Fannie Mae (FNM.P), the government-controlled company seen by the U.S. administration as a key conduit to stabilize the housing market, reported a $25.2 billion fourth-quarter loss, forcing it to ask for $15.2 billion from the U.S. Treasury

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