Citigroup starts its stock swap ... finally

This morning, Citigroup (NYSE: C) began its $58-billion stock swap, a move that could leave the government with a 34% stake in the bank. The country's third-largest bank plans to swap common stock for (up to) $33 billion in preferred shares and convert as much as $25 billion of preferred shares held by the U.S. Treasury into common stock.

The bank believes that the swap could (emphasis on could here) make Citigroup one of the world's best-capitalized banks. The action could add up to $61 billion of tangible common equity and $64 billion of Tier-1 common equity. Citigroup had planned to take this action back in April.

The stock swap could result in the issuance of more than 17 billion new common shares. Such a move could dilute the holdings of existing investors by 76%.

In terms of capital, Citigroup would be in a far better place thanks to the stock swap. Unfortunately, that isn't the case when it comes to the stock's technical performance. The stock continues to wallow in the $3 region, which some may see as a buying opportunity. Of course, others may view this as a sign of exactly how weak the stock has become. There are others still who will say the stock swap is a sign of how the government feels Citigroup is simply too big to fail.

Whatever your opinion of Citigroup watch for the stock to pop a bit this morning in response to the news.

With apologies to Buffalo Springfield, there's something happening here. What it is ain't exactly clear. But if Bank of America (NYSE: BAC) first quarter numbers are sustainable, then it may not be long before the government is out of the business of bailing out banks. That's because Bank of America reported a $4.24 billion profit -- its 44 cents earning per share was 40 cents a share more than the 4 cents a share the average analyst expected.

How did Bank of America achieve this feat? Like its peers, the bank benefited from gains on home refinancing -- on April 9 President Obama said that refinancings rose about 88% in the last month -- and trading. But don't get too excited because Bank of America expects more credit problems, which is why it added $6.4 billion to its loan loss reserves.

Meanwhile, the U.S. has invested huge amounts in Bank of America in various forms. The Treasury owns $45 billion of Bank of America preferred shares, the FDIC guaranteed $41.7 billion worth of debt that Bank of America sold, and the government guaranteed $118 billion of assets so it wouldn't back out of a deal to buy Merrill Lynch. But with stress test reports looming for May 4th, the U.S. is now talking about converting such preferred shares into common equity so that it can avoid asking Congress for more bank bailout money.

Would such a partial nationalization be good for Bank of America? Maybe. If the government converted its $45 billion in Bank of America preferred into common shares, then it would become by far the bank's largest shareholder, which would further dilute the holdings of all the other common shareholders. Such a conversion would also boost the bank's tangible common equity and cut back on the $700 million in preferred dividends it paid the Treasury -- although it would presumably keep paying some dividend on the new common shares.

Does this mean that Bank of America is out of the woods? It's too early to tell. It depends on whether it can keep posting big profits while limiting the costs of charging off bad loans. And those bad loans look mighty costly now since its credit-loss provisions more than doubled to $13.38 billion, its net charge-off rate rose to 2.85% from 1.25% a year earlier; its credit-card losses increased to 8.62% from 5.19% and its total nonperforming assets jumped to 2.65% from 0.9% in the prior year.

It will take several quarters of results before an answer becomes clear. But if Ken Lewis keeps beating expectations by 1000% as he did this quarter, his job will be less insecure.

Meanwhile, investors seem to be taking profits this morning -- the stock is down 7.7% in pre-market -- since its March 6th low the stock has risen 238% from $3.14 to $10.60 on Friday.

LOS ANGELES -After weeks of speculation, U.S. investment manager BlackRock Inc. said Thursday it will purchase the asset management arm of British investment bank Barclays PLC, including its iShares division, for $13.5 billion in cash and stock.

Barclays Global Investors is the world's largest asset manager with more than 3,000 institutional clients and approximately $1.5 trillion of assets under management as of Dec. 31. New York-based BlackRock, which will pay $6.6 billion in cash plus 37.8 million shares currently worth about $6.9 billion, said its takeover of BGI will create a firm with combined assets under management of more than $2.7 trillion.

BlackRock said the deal will allow the company to better tailor portfolios for retail investors by marrying its global mutual funds to the iShares' ETF platform.

Barclays had agreed to sell San Francisco-based iShares, the exchange-traded fund which generates half the profits within BGI despite managing less than a quarter of the operation's assets, to CVC Capital Partners for $4.4 billion. But under a "go shop" clause in the agreement, CVC has five business days to match or top BlackRock's bid for the whole Barclays unit or walk away with a $175 million breakup fee.

Blake Grossman, CEO of Barclays Global Investors, will serve as a vice chairman of the combined firm, head of scientific investing, and a member of the Office of the Chairman. Barclays Chief Executive John Varley and President Bob Diamond will join BlackRock's board.

At closing ― expected in the fourth quarter ― BlackRock will have more than 9,000 employees in 24 countries.

Barclays' sale of BGI is part of its effort to raise capital after it declined to take part in a multibillion pound bailout of the struggling British banking system last year alongside Lloyds Group and Royal Bank of Scotland. The bank instead raised billions from Middle Eastern investors and agreed to sell the iShares fund management business.

Barclays also decided, after passing a "stress test" of its assets by regulators, not to participate in the government's Asset Protection Scheme to underwrite potential losses on toxic assets.

The deal gives Barclays a 19.9 percent stake in the new BlackRock Global Investors, representing a 4.9 percent voting interest. There will be certain restrictions on Barclays buying or selling BlackRock shares, but the British bank will have the right to maintain its ownership percentage if BlackRock issues additional shares in the future.

BlackRock said it will fund the cash portion of the purchase price through a mix of existing cash, debt facilities and proceeds from issuing 19.9 million shares to a group of institutional investors for $2.8 billion.

A group of banks, including Barclays, Citi and Credit Suisse, has committed to provide BlackRock with a new 364-day revolving credit facility of up to $2 billion, which would be repaid by any capital raising efforts and refinanced with the proceeds of term debt financings.

The transaction is subject to approval by Barclays shareholders and regulators.

Citi and Credit Suisse served as lead financial advisers to BlackRock. Banc of America Merrill Lynch Securities, Morgan Stanley, and Perella Weinberg Partners provided additional financial advisory support. Skadden, Arps, Slate, Meagher & Flom served as legal counsel.

Shares of BlackRock closed earlier up $4.08, or 2.3 percent, at $182.60. Barclays shares ended up $1.25, or 6.7 percent, at $19.90 and added 35 cents in aftermarket electronic trading.

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