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NEW YORK CITY-Citigroup announced Friday it would issue common stock in exchange for preferred equities, an arrangement that would greatly increase the federal government’s stake in the financial services giant without entailing more taxpayer dollars. The Treasury Department will convert up to $25 billion of the preferred shares it bought through TARP into common stock at an exchange price of $3.25 per share, under an agreement with Citigroup.

According to a statement from Citigroup, the stock swap would boost the government’s share of the company’s common stock from 8% to 36%, making it the single largest Citigroup shareholder. It’s the major component of a Citigroup plan to exchange $27.5 billion of existing preferred securities for common stock, intended to increase the company’s tangible common equity from its Q4 2008 level of $29.7 billion to as much as $81 billion.

As part of the plan, dividends will be suspended on both preferred shares and the converted common shares, according to Citigroup. Other major participants in the exchange include the Government of Singapore Investment Corp., HRH Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud, Capital Research Global Investors and Capital World Investors.

A Treasury release states that Citigroup will look to replace many of its board of directors “as soon as feasible,” although CEO Vikram Pandit will remain in place. In a statement, Citigiroup chairman Richard Parsons says the board presently has 15 directors, “three of whom have announced that they will not be standing for election at the April annual meeting and two of whom will reach retirement age by the time of the meeting. We are actively conducting a search and expect to announce several new directors shortly.”

The stock-swap announcement occurred as Citigroup announced that it took a goodwill impairment charge of $9.6 billion related to its global consumer banking operations during Q4 ’08. The company’s net loss for ’08 was $27.7 billion.

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