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.
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 in San Francisco.
The conversion plan would give the government greater flexibility in dealing with ailing banks. It would give the government voting shares, and therefore 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.
Citigroup stock rose about 10 percent Monday, its first gain in eight days. The bank has posted five straight quarterly losses, including $8.3 billion in the fourth quarter. It is working to cut expenses, sell assets and return to a profit.
The broader market sold off. The Dow lost 250 points, closing at about 7,115. At its peak less than a year and a half ago, the Dow stood at nearly twice that. Monday’s close for both the Dow industrials and the broader Standard &Poor’s 500 was the lowest since 1997.
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