Citigroup plots share issue to move beyond Treasury reach

Talks proposed over how to repay taxpayer bailouts

Citigroup, the giant financial conglomerate that was twice bailed out by the US government last year, has floated a plan to raise new money from the stock market to help it repay taxpayers.

The company's shares slid more than 8 per cent in early trading yesterday after it emerged that it was working on a plan to sell as much as $5bn in new stock, diluting existing equity investors.

Citigroup's advisers are also hoping to persuade the US government to sell some of its 34 per cent stake in the company at the same time, a move that would reduce the power of government officials who have been putting considerable pressure on management since last autumn. No formal proposal has been drawn up, although it was reported last night that Citigroup called a Treasury official over the weekend to ask to begin talks.

The US government has pumped a total of $45bn into the company since last October, including a $20bn tranche agreed at the end of November amidst the threat of a run on the bank. That second bailout put Citigroup into the group of companies deemed to have received "special assistance" from the government, and which therefore have to submit to federal oversight of their pay practices.

"Everyone would be interested in getting a monkey off your back and getting out of the government," the analyst Meredith Whitney said in an interview with CNBC television. "And I'm sure the government wants to get Citi off of its dole. It's a question of how they do it."

The original government investment was in the form of preference shares, but these do not count towards the capital requirements ordered under the "stress test" conducted by regulators on Citigroup and other major banks in the spring. In order to comply with the outcome of the stress test – which set capital levels that have to be achieved to restore confidence that Citigroup can survive a deep recession – preference shareholders last week exchanged their investment for ordinary shares.

Having exchanged its first $25bn in preference shares, the US taxpayer now owns 7.7 billion ordinary shares, worth $33bn yesterday. Under Citigroup's plan, part of the $5bn it raises – perhaps as early as later this year – would be used to buy back some of the government's remaining preference shares.

Dick Parsons, Citigroup chairman, said earlier this week he was confident that the bank would be able to repay the investment from the government, and although he declined to predict when, he did say he expected taxpayers would make a return on their investment.

The Treasury's concerns go beyond simply needing to show that taxpayers made, rather than lost, money on the Wall Street bailouts of last year. It and the financial system's other regulators are trying to ensure that problems at Citigroup do not infect the rest of the credit markets. The bank still has tens of billions of impaired mortgage investments on its books and is in the throes of a big internal restructuring.