Halfway down into Edmund Andrews’ piece in the Times about the bank ‘stress tests’ which start this week …

In yet another sign of distress for the banks, Citigroup officials were in active talks with federal regulators on Sunday night about the government’s potentially buying a bigger chunk of the giant bank, according to a person with knowledge of the talks. Citigroup officials approached the regulators with a plan that would allow them to convert a substantial amount of the $45 billion of preferred shares held by the government into common stock, this person said. That would give the government a much bigger ownership stake in the company, and would probably increase the government’s influence in the bank’s business dealings. Federal officials have already pressured the company to shrink itself and shake up its board.

Eric Dash has more at DealBook. Seems to be an effort to get the government to convert its preferred shares into common stock (and perhaps get other sovereign wealth funds to do the same — good point since the USG sort of is a SWF at this point) to get into a better position ahead of the ‘stress test’. This is all to avoid having to come to the Feds for another lifeline. And I confess I don’t fully grasp the value implications of the stock conversion. But it doesn’t exactly inspire one with a great deal of confidence in Citi’s viability.

And come to think of it, TPM banks with Citi. Hmmm …

Late Update: FT has a bit more. They say it would leave the US govt. with a 40% stake in Citigroup, though it seems unclear how the current shareholders can really offer anything less than a controlling stake now since the bank has essentially zero value. It all seems like some sort of desperate last minute gambit in advance of the stress test when Citi’s really not holding any cards. Sort of like proposing mini-nationalization (USG owning just under half) to get the government off the idea of eating the full meal. (The best discussion I’ve seen is this one in the Journal.)

Latter Update: As I read more about what’s happening here, I almost wonder if this is the nationalization decision, just in a way that no one quite wants to concede, since it makes even more explicit that the US is effectively in control of the bank. That said, the whole thing just seems to show that the institution is not viable. So why are the existing shareholders holding on to anything? They’re trying for yet another ad hoc temporary fix. Which may be why the Feds appear to be hesitant, if not outright balking.