Tags: citigroup | stake | talks

Report: U.S. May Gain Larger Stake in Citigroup

Sunday, 22 Feb 2009 10:20 PM

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The Obama administration is in talks with Citigroup Inc. to possibly expand government ownership of the bank, according to The Wall Street Journal.

Citing unnamed sources, the Journal stressed that the deal could still fall apart, but it also could result in the government owning as much as 40 percent of Citigroup’s common stock. That would give federal officials far greater influence over one of the world's largest financial institutions.

Citigroup, which hopes to limit the government’s share to 25 percent, has proposed the plan to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks.

The talks come as lawmakers and leading experts are beginning to push nationalization of the banks as a very real possibility. There is a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup's share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.

One scenario being considered involves a large chunk of the $45 billion in preferred shares held by the government being turned into common stock, people familiar with the matter said, according to the Journal. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their shares diluted. A larger ownership stake by the federal government could fuel speculation that other troubled banks will line up for similar agreements.

Citigroup's low share price already reflects, at least in part, a fear among shareholders that their stakes might be further diluted. A government move to take a big stake in the bank could backfire, potentially spurring investors to flee other banks, even healthier ones, according to the Journal.

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