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Citigroup Inc. is closing in on an agreement to boost the federal government's stake in the company to as much as 40%, according to people familiar with the situation. A deal could be announced as soon as Thursday.
But a greater U.S. stake will bring a slew of new complications for executives of the New York company.
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.
NEW YORK, Feb. 24, 2009 (Reuters) — Even if the government took a large common equity stake in Citigroup Inc, worries would likely persist about the bank's ability to absorb soaring losses in a deepening recession.
The third-largest U.S. bank by assets is in talks with federal regulators on a plan for the government to increase its stake, a person familiar with the matter said. Converting $45 billion of preferred stock, which the government obtained last fall, to common stock is one of many options, the person said.
Converting preferred shares to common equity "helps their capital ratios but it doesn't help their problem assets," said Walter Todd, portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina. "If Citi were out of the woods, the stock would not be at $2."
The U.S. government will exchange up to $25 billion in emergency bailout money it provided Citigroup Inc. for as much as a 36 percent equity stake in the struggling bank.
The deal announced Friday _ the third attempt at a rescue plan for Citigroup in the past five months _ is contingent on private investors also agreeing to a similar swap.