Government, Citi talk about increasing federal ownership
— -- A proposal to expand the government's stake in Citigroup is fanning fears that a federal takeover will ultimately be needed to shore up the distressed banking industry.
The source, who declined to be named because the person is not authorized to speak publicly about the issue, said one option under discussion involves converting some of the government's preferred shares in Citigroup to common stock. This action, if taken, would boost a key measure of Citigroup's financial health and its capital levels.
Michael Hanretta, a Citigroup spokesman, said the bank's capital levels are "very strong," but declined to say whether it's in talks with the government. The Treasury Department, in a statement, said it doesn't comment on conversations with specific banks. Banks that need to improve their capital levels, Treasury said, can apply to convert their preferred shares into a type of stock that can be exchanged for common shares.
If the government ends up taking a controlling stake in Citigroup, that would amount to "effective nationalization," because American taxpayers will be the largest shareholder in the bank, says Duke University finance professor Campbell Harvey.
The White House has said it prefers to keep the banking system in private investors' hands, rather than bringing it under government control. Still, government agencies on Monday pledged to do whatever necessary to keep the banking system running.
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