Citi gains Geithner backing for $58-bn share conversion

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: Citigroup Inc is poised to start a $58 billion stock swap that was delayed last week as Federal Deposit Insurance Corp chairman Sheila Bair questioned chief executive officer Vikram Pandit’s leadership and the bank awaited regulatory approval from other agencies, people close to the bank said.

Bair backed off and the US treasury department signaled it would sign a final agreement to take a 34% stake in the bank, clearing the New York-based lender to proceed without further review by securities regulators, people familiar with the matter said. The exchange of preferred stock for common was announced three months ago.

Citigroup is counting on the exchange to replenish an equity base eroded by $36 billion of net losses during the past six quarters. Last week’s encounter with Bair underscores the scrutiny Pandit, 52, faces as the former Morgan Stanley banker steers the lender toward partial government ownership to shore up its finances.

“This is not about Pandit himself,” said Joshua Rosner, managing director at New York research firm Graham Fisher & Co. “Sheila Bair appears to be the only prudential regulator in Washington who has any understanding of the need to force the disgorgement of troubled assets from troubled institutions. And you cannot have a healthy banking institution without doing that.” Citigroup shares fell 7% last week to $3.46, erasing two weeks of gains. The stock is now hovering where it was in mid-February, just before it began a two-week slump that forced Pandit to seek a rescue from treasury secretary Timothy Geithner.

A person familiar with the FDIC offered a different version of the events last week. The agency had encouraged Citigroup’s conversion plan and had been talking with the bank about it for months, this person said. The situation is being driven by Citigroup’s need to address its woes, not a feud between Bair and Pandit, according to the person.