Citigroup Begins $58 Billion Conversion of Shares
By Josh Fineman

June 10 (Bloomberg) -- Citigroup Inc. began swapping $58 billion of preferred stock into common, a deal that will make the U.S. government the bank’s largest shareholder and close a shortfall in common equity found in stress tests last month.

A portion of the Treasury’s $25 billion of preferred stock will be converted to common, the company said today in a statement, giving the government a 34 percent stake in the New York-based bank. Citigroup will also exchange as much as $33 billion of preferred securities not held by the government.

Citigroup is counting on the transaction to replenish an equity base eroded by $27.7 billion of losses last year. The bank said in April it would delay the swap until government stress tests were completed. Those results came last month. It was also held up as Federal Deposit Insurance Corp. Chairman Sheila Bair questioned the company’s leadership, people familiar with the matter said.

“The faster they can resolve the share conversion the better,” said Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which has $13.8 billion under management, including 1.1 million Citigroup shares. “They’ve got to make their future clear and clear the smoke away as soon as possible.”

More than 17 billion shares may be issued to the government and other preferred holders, diluting existing stockholders by about 76 percent. The deal is set to expire July 24, and distribution would be made on July 30.