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Government Moves Into Citi?


Common shareholders could get taken out to the woodshed... again.

It may not be nationalization, but it's pretty close.

Last night, the Wall Street Journal reported the federal government is considering taking a large step closer to outright control of Citigroup (C). Having already sunk tens of billions of dollars into the troubled bank, the Treasury Department may now convert its non-voting preferred stock into Citgroup common stock. This would give government officials voting rights and more control over management's decisions. The Journal reports the government could own as much as 40% of the company, although bank executives are hoping the stake will come out closer to 25%.

And while taxpayers wouldn't be asked to pump in additional funds, the move would further dilute current shareholders. But there isn't much left to dilute: The company's shares traded below $2 Friday, and were off more than 50% as recently as February 10.

Reeling from credit losses and worsening economic conditions in the US and abroad, Citigroup is at the leading edge of the financial storm. And nervous politicians are taking a more active role in bank management, concerned that capital injections, debt guarantees and loss-sharing agreements may not be sufficient to allow banks to retain their independence.

The Obama administration did say on Friday, however, that nationalization isn't in the cards for Citi and Bank of America (BAC). Nevertheless, nationalization calls are being heard loudly across the globe. Politicians, academics and pundits are weighing in, many arguing state control is the system's only hope to survive.

Banks, for their part, claim they don't need the help: They claim that fear, rather than fundamentals, are driving their shares into the ground. In addition to Bank of America CEO Ken Lewis, JPMorgan (JPM) chief Jamie Dimon and Wells Fargo (WFC) CEO John Stumpf have asserted that their institutions are solvent enough to go it alone.

In his public remarks on Friday, Stumpf even managed to sound upbeat about the future. "There is so much to look forward to. I don't know what we're going through today, but it will probably define our generation. This can be the next greatest generation."

Indeed. As Toddo often says, "In order to get through this, we need to go through it." And with stress tests on tap for the nation's biggest banks, we may soon find out just how much we'll have to go through to get to the other side.
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