Embattled Citigroup Inc. and the U.S. have reached an agreement in which the government will substantially increase its stake in the bank and in return will demand a boardroom shakeup, according to people familiar with the matter.
Under a deal expected to be announced early Friday morning, the Treasury Department has agreed to convert some of its current holdings of preferred Citigroup shares into common stock. The government will convert its stake only to the extent that Citigroup can persuade private investors to do so alongside the government, the people said. The Treasury will match the private investors' conversions dollar-for-dollar up to $25 billion.
The size of the government's new stake will hinge on the amount of preferred shares that private investors, including sovereign wealth funds, agree to convert into common stock. The Treasury's stake is expected to rise to 30% to 40% of Citigroup's shares, the people said.
As a condition to the agreement, which is designed to ease investor jitters about the adequacy of Citigroup's capital base, the government is demanding that the New York company overhaul its board of directors, the people said. Treasury will call for Citigroup's board to be comprised of a majority of independent directors.
Chief Executive Vikram Pandit is expected to keep his job under the agreement.
The conditions imposed by the government were hammered out over a week of negotiations. They are designed to make up for the fact that taxpayers will bear greater risk holding common stock rather than preferred. The common shares also won't pay dividends, unlike the preferred stock.
The Citigroup deal has been closely watched not only due to its importance to Citigroup's financial health, but also because it is expected to serve as a model for future federal conversions of preferred shares into common stock in some of the nation's biggest banks.
Key details of the Citigroup-U.S. pact remain unclear.