How will Citigroup changes affect you and the economy?

In the latest effort to bolster the credit markets, the government dramatically expanded its stake in Citigroup clast week. The government will take as much as a 36% ownership — up from 8% — to give the bank financial stability.

Here's a look at how the deal will affect consumers, the banking industry and the economy.

Q: How does the deal work?

A: The government will exchange as much as $25 billion of its preferred Citigroup shares for common stock, matching share conversions by other investors. Currently, the government holds $45 billion of preferred shares and has a loss-sharing agreement on $301 billion of troubled Citigroup assets.

Preferred-stock holders, including the Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors, have agreed to convert their shares. But the government's ultimate stake in Citigroup also depends on whether other shareholders do the same.

The conversion boosts a key measure of Citigroup's financial health that is getting more attention from investors and regulators. But Citi's existing common shareholders could see their ownership reduced to 26%. Current preferred shareholders would own up to 38%.

The transaction requires no additional government investment, but as the government's stake rises, so does the risk to taxpayers. Taxpayers also have the potential to profit if Citigroup rebounds. Citi is also suspending dividends on both its common stock and preferred shares, saving several billion dollars a year.

Q: Why the focus on common shares?

A: Common shares are a conservative way to measure how much capital a company has on hand to cover losses. Investors and regulators are paying particular attention to "tangible common equity," or TCE, which basically measures how much common shareholders would get if the institution were liquidated.

Until now, regulators measured banks' financial health mainly by its so-called Tier 1 capital level. Tier 1 capital includes common equity, but also preferred equity and retained earnings.

Most banks, including Citi, are well capitalized by Tier 1 standards, yet are struggling to raise capital to cover future losses. This paradox fanned concerns among regulators and investors that judging a bank's financial health by its Tier 1 capital was inadequate.

Ned Kelly, head of global banking at Citigroup, believes that while the economic environment has enhanced the focus on tangible common equity, "to the extent that things improve, the focus may very well recede."

Q: Will banks need furthergovernment intervention?

A: Very likely. The government is stress-testing the 19 largest banks with more than $100 billion in assets — these institutions have about $5 trillion in combined assets — to gauge whether they have enough capital to survive an extended downturn.

It's unclear how many institutions the government will need to prop up. Investors sold shares of banks including Citigroup, Bank of America and Wells Fargo on Friday, possibly on concern that large government stakes will dilute shareholders' interest.

Q: As banks' financial conditions deteriorate, what impact will consumers feel?

A: As the market drops, consumers who own bank stocks will see investments fall more.

Credit card costs are also going up for many consumers. Most major banks are raising card rates or fees as they grapple with alarming losses from toxic assets.

More banks will also fail. This year, 16 banks have failed, compared with 25 in 2008 and three in 2007. The largest, including Citigroup and Bank of America, are considered too large to fail.

But if your bank fails, you're generally covered for up to $250,000 per account per customer. Businesses have greater protection: The FDIC is guaranteeing an unlimited amount in non-interest-bearing accounts, such as business payroll accounts, through 2009.

Contributing: Sue Kirchhoff