According to the AP (via Yahoo! News), "Citigroup Inc.'s bid to boost its equity capital could result in the federal government raising its stake in the troubled bank this week to as much as 40 percent."
Citigroup already has received $45 billion in U.S. bailout money made up primarily of debt-like preferred shares, plus federal guarantees to cover losses on some $300 billion in risky investments. (...) While the exact details of the talks aren't known, they could center on the terms of converting the government's $45 billion in preferred shares into common equity. The preferred shares carry a high interest rate, requiring a yearly payout of billions in coupon payments. But if converted to common stock, Citi's annual dividend payout would be minimal since it's been cut to just 4 cents per share.
In a post about converting the government’s AIG preferred shares into common stock, DarkSyde explained:
In the financial world, common stock is another term for the kind of stock most people think of when they think of the stock market (Lately between cursing and heavy drinking). Basically, if a company goes belly up, its assets are sold and the proceeds go to bondholders first, preferred shareholders second, and common share holders last.
In addition to the difference between the dividend for common stock and preferred shares, along with the additional risk of being last in line for payment, Citigroup is trying to pull yet another fast one on the taxpayers.
According to a post from The Business Insider:
Citigroup's common equity is currently worth $10 billion. If the US were to convert all $45 billion of its preferred at the current stock price, it should end up with 80% of the company, not 40%.
For the US to convert $45 billion of preferred to common and only get 40% of the company, Citigroup's existing common equity would have to be valued at $65 billion, not $10 billion, and the conversion price would have to be about $10 a share. Or the US would only be able to convert $4 billion of its $45 billion, which wouldn't help Citigroup's tangible equity ratio much.
Apparently the goal is to keep the government's ownership of Citigroup under 50% so the deal won't be "nationalization." I may be missing something, but it appears that if this "preferred-to-common" swap happens, the taxpayers will be royally screwed.