May 4, 2009
Making financial news headlines is the still-unofficial results of the stress test. Apparently, Citigroup may need to raise as much as $10 billion in capital in order to comply with the new standards. However, in an interview with the Wall Street Journal, the bank had argued that this may not be necessary. In fact, Citibank is currently conducting its own analysis and is expecting to find that it already has $500 million as capital safety net. But it was reported that because of Citi’s objections, the findings of the bank stress test will be delayed to May 7 which is three days later than the supposed announcement date.
Citigroup Trying to Raise Additional Cash
It is expected that Citigroup may try to get additional capital from private investors instead of the government bailout money. The New-York based bank was already given $52 billion on rescue funds last year. Under the current plan, the government can convert $25 billion of its stake for a 36 percent voting interest. If it decides to convert the remaining $27 billion, Citigroup will need to cede control. This is a scenario no one wants to ponder for the once biggest US bank.
One solution that is being pointed out is to convert $10 billion privately-held securities. It will be added to the pending exchange to bring Citigroup over the threshold required by the Federal Reserve. Other plans include selling “non-core” business such as the Nikko Cordial Securities and the Smith Barney brokerage to free up capital.
How the Stress Test Will Affect the Future Intervention
The government has previously revealed that it will not allow any of the 19 biggest banks that underwent the stress test to collapse. Those that are found to require additional capital, but are unable to acquire it, may be given additional loans. Later, the administration will reveal what “type of investor it will be in companies where it has a stake” according to the Journal.
Undeniably, the results of the stress test will be felt in the entire financial industry. It will play a big role in determining future government intervention in the financial system. After the results are announced, the banks will be given 30 days to present a plan to the government and six months to implement it.
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