Citi Group is looking for the U.S. Government to restructure its capital infusion of $45 billion dollars into the Bank. Citi has opened talks to convert that capital, which granted the government preferred shares, into common stock. The move would dilute existing common stock and give the U.S. government a larger ownership share. From the Wall Street Journal:

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn’t cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.

Citi has seen its stock price plunge to below $2 per share, leaving it with a market cap of about $10.5 billion. So the government, with a cash injection of $45 billion, gets a 40% ownership stake in a company worth $10 billion. Not a bad deal for Citi shareholders and management. Many Citi defenders point to the massive shorting of Citi stock, and are calling on the Obama Administration to reinstitute rules that would limit such “short selling”. There is no doubt that it has had an impact, but it is coming to the point that the government will need to step in and fully nationalize banks that are insolvent. Short term ownership, with a shedding of bad assets, recapitilization, and then a sale to private capital, is what is needed. No question that such an action will hurt institutional investors, including pension funds and insurance companies. But they are being hurt now! It is not possible for the government to insure against all losses, so we should suck it up now, while we still can.