Government May Acquire Large Stake in Citigroup, Report Says

By: • Mon, Feb 23 2009, 9:06 AM

The Wall Street Journal reports that the U.S. government is in talks to "substantially" expand its ownership in Citigroup.

According a story published on Sunday, the U.S. government could end up owning as much as 40% of Citigroup's common shares, an amount that would give it greater influence in the company.

The report says Citigroup has proposed the plan to its regulators but executives at the bank hope the stake will only be about 25%, according to people familiar with the discussions.

The government's 7.8% stake, $48bln in preferred shares acquired when it injected capital into the company last year, would be converted into common stock, according to the report.

The story comes on the heels of increased market speculation that Citigroup may be nationalized as its financial situation fails to improve.

On Friday, Senate Banking Committee Chairman Christopher Dodd roiled markets when he said the U.S. may have to temporarily nationalize certain banks. The headlines sent shares of Citigroup and Bank of America down more than 20% on fear they could be involved in any such nationalization

"I don't welcome that at all, but I could see how it's possible it may happen," Dodd said on the Bloomberg Television program Political Capital with Al Hunt.

"I'm concerned that we may end up having to do that, at least for a short time," he said.

Dodd did say that the Obama Administration is doing what it can to avoid such action.

However, shares of Bank of America and Citigroup rebounded sharply later on Friday after the White House reaffirmed its commitment to a private banking system.

At a press briefing, White House press secretary Robert Gibbs said the Obama administration continues to "strongly believe that a privately held banking system is the correct way to go."

Following the White house comments, stocks erased much of their losses but failed to close in positive territory. Shares in Bank of America closed down 3.56% to $3.79 while Citigroup shares closed down 22.31% to $1.95, a record low.