The bank is hopeful, though, and is planning a $15 billion common stock offering, people briefed in the matter said.
The Treasury is more open to Citigroup's plans than the Federal Deposit Insurance Corp, the person familiar with the matter said.
Citigroup is one of the last major banks that has not yet repaid government bailout funds. It is keen to repay before year-end because it wants to get out from under government pay restrictions. The bank fears those restrictions could cost it some of its most talented employees, sources said.
But the government wants to be certain that Citigroup is strong enough to go out on its own.
Asked at a hearing about news reports that Citigroup is looking to raise private capital to repay bailout funds, Treasury Secretary Timothy Geithner said it is a good thing for the country that institutions are eager to return the funds.
But he said the government is going to ensure that the big banks are well-positioned to return the funds before granting approval.
The basic objective is to make sure as we exit ... we're leaving the capital position of the institutions stronger, not weaker, Geithner said.
Citigroup borrowed $45 billion last year under the Troubled Asset Relief Program.
This year, the government agreed to convert $25 billion of those funds into Citigroup common stock, leaving the United States with a roughly 34 percent stake in the bank.
A Citigroup spokesman and a Treasury spokesman declined to comment.
READY TO PAY
The bank's chairman, Dick Parsons, said on Wednesday on CNBC that Citigroup was in a position to repay the bailout funds and was in talks with regulators about it.
Bank of America Corp
That leaves Citigroup and Wells Fargo & Co
The other original TARP recipients, including Goldman Sachs Group Inc
Citigroup shares were up 4 cents to $3.90 in morning trade on the New York Stock Exchange.
Sources have told Reuters that the government and Citigroup are working to resolve a series of issues, including how the government will sell its Citibank shares, which are now worth about $30 billion. The government is also talking to Citigroup about the future of the guarantee that the government gave the bank against excessive losses on a pool of assets that was originally about $300 billion.
Citigroup executives, along with officials of 11 other banks, will meet on Monday with U.S. President Barack Obama, who summoned the bankers to press them to increase lending to small businesses and discuss his administration's financial regulatory reform efforts.
Deutsche Bank analysts estimated that Citigroup's Tier 1 common capital ratio would end 2009 at about 9 percent before a capital raise, compared with 9.1 percent at the end of the third quarter. For banks overall the rate is 7.5 percent, so by some measures Citigroup is very well capitalized compared with competitors.
But by other measures, the bank does not look as strong. A Standard & Poor's analysis late last month said the bank was below the ideal level.
The S&P analysis looked at capital levels appropriate for the risks on the bank's balance sheet. S&P said Citigroup had a risk adjusted capital ratio of 6.2 percent, below the 8 percent that the ratings agency said was appropriate for covering risk.
(Reporting by Karey Wutkowski and Dan Wilchins; Additional reporting by Steve Eder, Juan Lagorio, and Paritosh Bansal in New York and Lisa Lambert, David Lawder, and Matt Spetalnick in Washington; editing by John Wallace)