Treasury considered plan to bust Citi shorts


Officials Weighed Plan to Buy Citi Shares

By Henny Sender
Financial Times, London
Monday, November 24, 2008

NEW YORK -- US regulators considered a proposal to buy Citigroup shares in the secondary market before deciding on a plan to buttress the bank with $20 billion in fresh capital and $306 billion in guarantees for distressed assets, people involved in the talks said.

Under the plan revealed on Sunday, the Treasury will invest $20 billion in preferred shares in Citi -- in addition to the $25 billion it has already put into the group.

However, regulators briefly considered investing as much as $30 billion in Citi -- including $15 billion in preferred shares and $15 billion in common stock to be bought in the secondary market, participants in the talks said.

By buying Citi common stock in the open market, regulators could have increased pressure on investors who sold Citi shares short -- selling borrowed shares in the hopes of buying them back to profit from a fall in the price. The Hong Kong Monetary Authority employed a similar strategy during the Asian financial crisis.

The talks also considered the question of replacing senior managers at Citi, including Vikram Pandit, chief executive, participants said. The regulators decided against this, in part because there were no obvious successors.

"If there was an obvious choice for a replacement for the chief executive officer, that would have levered up the benefit of the package," one participant said. "But there was no obvious queue of candidates."

The series of meetings began on Friday when Ned Kelly, Citi's head of global banking, and Lew Kaden, its vice-chairman, called the New York Federal Reserve. Citi's share price was on course to fall 60 per cent for the week, and Citi was worried that the drop would shake the confidence of creditors and counterparties.

As the Citi talks gained momentum, a separate politcal drama took shape on Friday when news broke that Tim Geithner, head of the New York Fed, was likely to be president-elect Barack Obama’s nominee for Treasury secretary.

Thereafter, Mr Geithner became a less visible participant in the discussions, and Kevin Warsh, a Fed governor, and John Dugan, comptroller of the currency, became more active.

The talks progressed slowly, reflecting disagreements over how any future losses would be divided among Treasury, the Federal Deposit Insurance Corp. and the Fed. The negotiators had hoped to resolve all issues by 8pm on Sunday so they could reveal details before Asian markets opened. They missed their deadline.

On Monday, the plan quickly met with criticism, even from those involved in forming it.

"If the company was in such bad shape, it begs the question of why there wasn't more supervisory action," said one person involved in the discussions.

Participants said the negotiations were marked by disagreements over whether the plan should put more onerous demands on Citi.

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