The U.S. government and Citigroup have reached a deal to convert up to $25 billion in government-held preferred shares in the bank to common equity, a person familiar with the transaction said early on Friday.
Under the deal to bolster the bank's capital base, Citigroup will receive no new government funds and must find private investors willing to convert their preferred stock to common shares, the person said.
The U.S. Treasury will match the private conversions dollar-for-dollar up to $25 billion. It currently holds about $45 billion worth of preferred stock purchased through two separate capital injections.
The transaction will greatly increase the government's equity stake in the struggling banking giant, but the size ultimately depends on the amount of privately held preferred stock that is converted, the person said. The government was expected to wind up with around 30-40 percent of the firm's common stock.
The deal, expected to be formally announced later on Friday, also includes a shake-up of Citigroup's board, with a majority of directors being replaced, but Chief Executive Vikram Pandit will keep his job, the person said.
The action, which marks the third major Treasury intervention to aid Citigroup since mid-October, follows more than a week of negotiations with the firm, once the world's largest financial services group.
The increase in the firm's common equity is expected to greatly increase its tangible equity capital ratios, making it better able to withstand losses.
(Editing by Ian Geoghegan)