Citigroup close to ownership deal with government

As Citigroup Inc. nears a deal that could see the government's ownership in the bank increased to as much as 40 percent, concerns are mounting about the potential impact a bigger U.S. stake could have on the troubled firm. According to a report in the Wall Street Journal Thursday, increased U.S. ownership could require the bank to apply for new charters with local governments in other countries where it operates. The worry is that some governments could deny Citigroup new charters, conceivably forcing it to shed profitable businesses and stop operating in those countries. One potentially debilitating snare, for example, is a Mexican law that prohibits any institution more than 10 percent-owned by a foreign government from operating a bank in that country, the Journal said. This could prove an obstacle to Citigroup maintaining its ownership of Grupo Financiero Banamex, one of Mexico's largest banks. A Citigroup representative was not immediately available to comment on the report. Citigroup has previously denied rumors that it plans to sell Banamex amid pressure to shore up capital and streamline its operations. The New York bank has already received $45 billion in government aid made up primarily of debt-like preferred shares, plus federal guarantees to cover losses on some $300 billion in risky investments. It also has transferred control of its Smith Barney brokerage to Morgan Stanley in return for $2.7 billion. More asset sales are expected now that the bank has split itself in two. One unit is comprised of its traditional banking operations, while the other holds its riskier assets. The bank has been involved in talks with regulators this week over ways the government could help strengthen the bank still further. While the exact details of the talks aren't known, they could center on converting the government's $45 billion in preferred shares into common equity. The preferred shares carry a high interest rate, requiring a yearly payout of billions in coupon payments. But if converted to common stock, Citi's annual dividend payout would be minimal since it has been cut to just 4 cents per share. While an increased government stake would further dilute current shareholders' investments, a wider equity base could calm investors since there would be more reserves to protect against future losses. Citi has been among the hardest hit financial firms during the ongoing credit crisis and recession. It has posted five straight quarterly losses, including a fourth-quarter loss of $8.29 billion. Shares added 18 cents to $2.70 in pre-market trading.