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US Government to Take  Bigger Stake in Citigroup

Shares of Citigroup plunged more than 30 percent Friday after the U.S. government reached a deal with company officials to convert up to $25 billion in bailout money into common shares.

The share designation does not guarantee regular dividend payments but typically provides shareholders with the right to vote.

The deal gives the government a larger say in the ailing bank, but it also increases the risk to U.S. taxpayers.

A deal struck between Citigroup and the US Treasury Department on Friday marks the government's third rescue attempt for Citigroup in five months.

The agreement will give the government a 36 percent equity stake in the company.

"What we've really had to date is sort of a slow, de facto nationalization," said Neil Weinberg of Forbes Magazine, "Where the government's ownership stake in Citigroup has over time, gotten greater and greater."

Although the stock conversion will give the government greater say in how the company operates, it also exposes taxpayers to greater risks if the bank fails.

White House economic adviser Paul Volcker tried to quell speculation about the government's intentions at a congressional hearing on Thursday. Volcker stated, "I would not call that nationalization, I would call that capital restructuring."

Citigroup has already received 45 billion dollars in bailout money from the government.

But with the Obama administration proposing another 750 billion dollars to stabilize the financial system, Weinberg says why not take over troubled banks entirely?

Weinberg added, "Citigroup, Bank of America are names that come up prominently. Take them over completely, get rid of the bad assets. Because what you have right now are zombie banks. They're neither dead nor alive, they can't really help the economy by lending aggressively and so you need to clean them up."

As part of the deal, dividends for preferred shares were suspended.

The move sent Citigroup shares sharply lower, dragging the Dow Jones index close to an 11 year low.