Last updated: February 24, 2009 11:52 pm

Citi close to deal with Treasury

Citigroup and the US Treasury are nearing agreement on a deal that would give the federal government a stake of about 40 per cent in the troubled bank in exchange for bolstering its depleted capital base.

People close to the situation said no agreement had yet been reached and the government had yet to give its approval to the plan proposed by Citi, which stops short of outright nationalisation. But they added that negotiations between Citi’s executives and Treasury officials had made progress since the weekend and an announcement could come as early as Wednesday or Thursday.

Insiders say the deal, revealed by the Financial Times, centres on the conversion of part of the government’s $45bn of preferred shares into Citi’s common stock – up to a stake of about 40 per cent. Other shareholders, which include sovereign wealth funds and pension funds, would also convert some of their $30bn-plus of preferred stock into shares.

Citi, headed by Vikram Pandit, might add more capital through an equity offering. The moves would boost Citi’s capital base by adding more common stock without forcing the government and other investors to spend more money. But it would severely dilute other shareholders’ stakes.

Crucial details, such as the price of conversion and the stake the government will hold in Citi, are still to be finalised, people familiar with the talks said.

Citi declined to comment.

In recent days, the capital markets have been unnerved by uncertainty over the terms of the deal, the likely losses to be suffered by equity and bond investors and the effects on Citi’s operations.

Citi shares rebounded more than 21 per cent on Tuesday on investors’ hope for a resolution and positive comments on the sector by Ben Bernanke, chairman of the Federal Reserve.

The cost of protecting against a default on Citi’s debt fell after trading around its record high earlier in the day.

Regulators are due to begin “stress testing” banks’ ability to withstand a sharp economic downturn. The government has said it does not want to nationalise banks but has not ruled out taking large stakes in ailing institutions as a temporary measure.

Bank of America, which has already received $45bn from the government, has been seen as the next institution in line for a rescue but it has said it is not in talks with government officials.

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