Citi's (C) Preferred For Common Exchange Conference Call Summary

February 27, 2009 1:52 PM EST

Today's news de jour on Wall Street is Citi's (NYSE: C) plans to convert the government's preferred shares into common shares, to boost tangible common equity. After the move, the U.S. government would own approximately 36% of Citi's outstanding common stock and existing shareholders would own approximately 26% of the outstanding shares. With the news, the focus moves to which banks will be next to announce a similar move.

Citi's held a conference call with CEO Vikram Pandit and others to discuss the news. Below are some highlights:

• CEO Vikram Pandit: "the markets became increasingly focused on TCE and the stock price and preferred prices reflected this focus. What we announced today was not an easy decision for us because we understand the impact of the dilution we're asking you to bear. But in the end, our business is about confidence. As a matter of fact, the entire financial system depends on confidence and we wanted to take definitive steps to put all capital issues aside."
  
• our TCE to risk-weighted asset ratio will be more than 8% and our TCE to total asset ratio will be more than 4%.
  
• We run our own stress test... Based on these tests, this capital should take confidence issues off the table even in a stress environment.
  
• ...we have substantially cut our costs. We expect our expenses this year to be in the range of 50 to $52 billion, down from $61 billion in 2008. We've cut our head count by 52,000 people since the beginning of 2008. We've reduced our assets by about $413 billion from their peak and we've reduced concentration in our riskiest portfolios.
  
• ... our own stress test that appear at least at first glance to have economic assumptions that are somewhat more conservative than those included in the government stress test scenarios
  
• ...does this mean that we don't have to raise more capital? That was certainly the objective of the transaction if we successfully complete it. There are a number of factors however, that could affect this outcome and these factors would likely impact all financial institutions.
  
• the industry does not know what the financial impact of the governments economic stress scenarios will be. We know the impact of our stress scenarios on our financial results but that may not necessarily be the same factors that the government uses to translate the economic impact into a financial impact.
  
• the government could also impose a very high absolute standard of tangible common equity post these stress tests. We don't and I don't think others know if that's going to be the case.
  
• we will have a portion of the U.S. governments' investment that will not convert as part of this transaction and that of course would be available should that situation arise.
  
• This transaction will work as follows. First, the publicly issue is straight and convertible preferred stock and the TruPs and ETruPs will be offered an exchange for common stock. Second, the privately placed convertible preferred stock will be offered in exchange for an interim security and a warrant. The interim security would convert into common stock when shareholders approve and increase in the common stock. The sum of these two conversions will be capped at approximately $27.5 billion. Finally, the U.S. government will exchange preferreds under the first TARP agreement for the same interim security and warrants. The government will match the amount it exchanges to the amount converted by all other investors up to $25 billion
  
• Any public or private straight and convertible preferreds that are not exchanged as well as all common stock will seize paying a dividend. The TruPs and ETruPs will continue to pay interest at their current levels.
  
• the U.S. government and the preferred shareholders would own - would each own approximately 29% at the low end of the range and 38% at the high end
  
• existing shareholders would own the remaining 42% at the low end of the range or 24% at the high end of the range
  
• total common shares outstanding would increase from 5.5 billion at the end of 2008 to approximately 13 billion at the low end of the range to 22 billion at the high end of the range.
  
• Question from Mike Mayo: "... will Citigroup be run for the shareholders or is Citigroup going to be run to fulfill public policy goals or some other purpose. Answer from Vikrim Pandit - "... net, net we're going to run Citi for the shareholders."
  
• Question from Mike Mayo:"... is this something that regulators communicated to you and can you give us any other guidance on which capital ratios you need to manage through" Answer from Gary Crittenden: "... it's obvious that over the course of the last while the tangible common equity has become a big factor in the thinking of the equity markets"
  
• Question from Betsy Graseck:"....whether or not the investment by the U.S. government in the form of common has any implications for your ownership of TMX" Answer Vikram Pandit: ..."NO"

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