Citigroup Close to Reaching Deal With Government

Citigroup is closing in on an agreement to boost the U.S. government's stake in it to as much as 40 percent, the Wall Street Journal reported on its website, citing people familiar with the situation.

A deal could be announced as soon as Thursday, it said.

But a greater U.S. stake will bring a slew of new complications for executives of the New York company, the report said.

Mexican law bars any institution more than 10 percent-owned by a foreign government from running a bank in that country. Some Citigroup executives are worried that an increased U.S. stake might subject the bank to pressure to relinquish some or all of its ownership of Grupo Financiero Banamex, the No. 2 bank in Mexico by assets, the Journal said.

Though Citigroup is loath to shed Banamex, seen as a crown jewel of the bank's operations, executives have concluded that the issue will probably have to be resolved through diplomatic channels between the United States and Mexico, people familiar with the matter said, according to the report.

A representative of Citigroup was not immediately available for comment.

Word that the U.S. might be raising its stake in Citi first broke last week and intensified speculation that U.S. banks might increasingly face nationalization.

If one were to compare Citigroup's market capitalization with the number of preferred shares the government currently owns, these shares if converted right now to common stock, would be worth more than 100 percent of Citi's total market capitalization. 

Any additional money that Citi receives from the government automatically means a further stock dilution. While Obama Administration officials say this isn't nationalization, markets may interpret the situation differently and see it as de facto nationalization.

Citigroup stock dropped below $2 last week for the first time since January 1991, buffeted by nationalization speculation and closed at $2.52 on Wednesday. Citi stock has dropped 71 percent so far in 2009.

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