Citigroup (C) may not have picked up much in its deal with the federal government. It shareholders will get crammed down. Tax payers will own more of Citi, about 36%, which is not necessarily a win.

And, most of the board will lose their jobs, but less-than-competent CEO Vikram Pandit gets to stay.

Citi announced it will issue common stock in exchange for preferred securities, which will substantially increase its tangible common equity (TCE) without any additional U.S. government investment. The transaction is intended to build Citi’s TCE to a level that removes uncertainty and restores investor confidence in the company.

Citi will offer to exchange common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 a share. The U.S. government will match this exchange up to a maximum of $25 billion face value of its preferred stock at the same conversion price

This transaction could increase the TCE of the company from the fourth quarter level of $29.7 billion to as much as $81 billion, which assumes the exchange of $27.5 billion of preferred securities, the maximum eligible under this transaction. Citi’s Tier 1 capital ratio is 11.9 percent as of December 31, 2008, and is among the highest of major banks.

Based on the maximum eligible conversion, the U.S. government would own approximately 36 percent of Citi’s outstanding common stock and existing shareholders would own approximately 26 percent of the outstanding shares. All investors’ new stakes will be determined following the exchange.

Dick Parson’s, Citi’s Chairman, made the following statememnt: “On January 16, 2009, I announced on behalf of the Board of Directors that we had determined to ‘reconstitute the board… as quickly as possible.’ I am pleased to announce today the next step in reconstituting the Board: the Board unanimously decided to have a majority of new independent directors as soon as feasible. The Board presently has 15 directors, three of whom have announced that they will not be standing for election at the April Annual Meeting and two of whom will reach retirement age by the time of the Meeting. We are actively conducting a search and expect to announce several new directors shortly.”

The US, for all practical purposes, now owns the bank

Douglas A. McIntyre

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