The U.S. government will boost its equity stake in Citigroup Inc to as much as 36 percent, bolstering the bank's capital base in the latest emergency effort to save the banking giant.

In its third attempt to prop up Citigroup in the past five months, the government will convert up to $25 billion in preferred shares to common stock. Existing shareholders could see their ownership of the bank diluted by 74 percent.

While the latest rescue does not inject more money into Citigroup, it gives the government more of a voting stake and far greater influence over the bank's operations, short of outright nationalization. The White House said a higher U.S. stake will help achieve a better outcome for the bank.

The government is the new boss, said Mike Holland, the founder of money manager Holland & Co in New York. Every major decision is something that is not going to come out of Park Avenue, but is going to come from Washington, D.C.

New York-based Citigroup in October and November received $45 billion of taxpayer money, as well as a government backstop to cap losses on $301 billion of toxic assets.

Shares of Citigroup closed down 39 percent on Friday, and touched their lowest level in at least 18 years. The market value of what was once the world's most valuable bank has fallen to $8.2 billion, Reuters data show, from a peak above $270 billion roughly two years ago.

U.S. Bancorp's market value is more than three times greater than Citigroup's, though the regional bank's asset base is only one-seventh as large.

Moody's Investors Service cut Citigroup debt one notch to A3, its fourth-lowest investment grade, saying Citigroup is likely to shrink, which could diminish its relative importance to the U.S. banking system over the long run. Standard & Poor's affirmed its A rating, a notch higher.

CEO SAYS STILL IN CHARGE

Friday's agreement calls for Citigroup to offer to exchange common stock for up to $27.5 billion of its preferred shares at $3.25 per share. The government will match the exchange up to $25 billion, provided private investors do the same.

Citigroup will halt dividends on preferred and common stock, but maintain payouts on trust preferred securities.

The agreement could be a template for other lenders that have taken government money. It will boost Citigroup's tangible common equity ratio, a measure of capital, to between 5.4 percent and 8.1 percent from the fourth quarter's 3 percent.

On a conference call, Chief Executive Vikram Pandit said senior executives completely remain in charge of day-to-day operations.

The bank will shake up its board and install a majority of new, independent directors. Five of the board's 15 members are either not standing for reelection or will reach retirement age by the time of Citigroup's annual meeting in April.

Investors want to see heads roll because they're so angry at the entire banking industry, said Marshall Front, chairman of Front Barnett Associates LLC in Chicago, which invests $500 million. But Citigroup management is as well qualified to deal with the problems the bank faces now as anyone, and would not have the learning curve that new people would face.

Citigroup shares closed down 96 cents to $1.50 on the New York Stock Exchange. Front said the drop was not steeper because the stock long ago discounted substantial dilution, which is now being formally recognized.

Shares of other lenders also fell, including declines of 25.8 percent at Bank of America Corp and 16 percent at Wells Fargo & Co.

The Standard & Poor's 500 stock index fell 2.4 percent after the government said U.S. gross domestic product fell much more in the fourth quarter than analysts had expected.

Separately, Citigroup said it has recorded more than $8.9 billion of charges to write down goodwill and its Nikko Asset Management unit in Japan. The charges boost its fourth-quarter loss to more than $17.2 billion, and Citigroup's full-year loss to $27.7 billion.

CEO SAYS NO NATIONALIZATION

Citigroup and other large U.S. banks will soon undergo stress tests to assess their ability to cope with a severe recession, and whether they might need more capital.

Referring to the new rescue, Pandit said, This capital should take confidence issues off the table, even in a stressed environment. Asked about nationalization, he added, This announcement should put those concerns to rest.

The Obama administration has said it prefers to keep banks in private hands, and Federal Reserve Chairman Ben Bernanke this week rejected 100 percent government control of lenders.

The United States already has a nearly 80 percent stake in insurer American International Group Inc, while the British government owns 70 percent of Royal Bank of Scotland Group Plc.

There is so much going on in terms of trying to manage the continuing and unfolding drama around the credit crisis, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. At Citigroup, he said, the government didn't want to have to take any more than it had to.

NO PLANS TO SELL BANAMEX

Pandit has split Citigroup into two: Citicorp, which has retail banking and other businesses that Citigroup wants to keep, and Citi Holdings, which includes troubled or underperforming assets it wants to sell or wind down.

A higher government stake could complicate Citigroup's ability to operate in some of the more than 100 countries where it has businesses. Bank executives downplayed speculation that Citigroup might shed all or part of its ownership of Grupo Financiero Banamex, Mexico's second-largest bank.

We're not open to the idea of offloading assets that we really want to keep, Edward Ned Kelly, head of global banking and Citi Alternative Investments, said in an interview. Banamex is a very important property to us, and we are intent on retaining it and maximizing its value.

He also called the bank's Handlowy business in Poland an extraordinarily important franchise to us.

Citigroup said the preferred stock exchange could boost its common share count as high as 21 billion from 5.5 billion now. It said investors including Saudi Prince Alwaleed bin Talal, Singapore Investment Corp, Capital Research and Management and others had agreed to swap their preferred stock.

(Reporting by Jonathan Stempel and David Lawder)

(Additional reporting by Elinor Comlay, Joseph A. Giannone and Juan Lagorio in New York; Saeed Azhar and Kevin Lim in Singapore and Rafael Nam in Hong Kong; writing by John Stonestreet; editing by Jeffrey Benkoe, John Wallace and Carol Bishopric)

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