Citigroup talking to U.S. government as shares dive: source

By Dan Wilchins and Jonathan Stempel

NEW YORK (Reuters) - Citigroup Inc has begun talks with the U.S. government as its plummeting share price raises doubts about the bank's ability to survive, a person familiar with the matter said.

The bank has met with officials from the Federal Reserve and the U.S. Treasury Department in recent days to discuss its options, which include an endorsement from the government and another capital injection from the Treasury, the person said, requesting anonymity because he is not authorized to speak to the press.

The bank's management has also internally discussed selling off units or finding another bank to merge with. But it is not clear if anything short of capital from the government will soothe markets that are increasingly questioning whether Citigroup has enough capital to withstand the recession, the person said.

Citigroup spokeswoman Christina Pretto declined to comment.

Citigroup's shares lost 20 percent of their value on Friday, closing at $3.77, down 60 percent for the week and reaching their lowest level since December 1992

"It's fear and panic at this point," said Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland, Maine. "Investors have seen similar movies this year, and the endings are very unpleasant."

Chief Executive Vikram Pandit, working hard to regain employee confidence on Friday, said on a company-wide conference call that the bank does not want to change its business model and plans to keep its Smith Barney brokerage, despite news reports to the contrary.

He also said Citigroup had a solid capital position, and that employees should not focus on the bank's falling share price because that is not what regulators and credit rating agencies worry about, the people said.

Citigroup's board met Friday to discuss the bank's options, a person familiar with the matter said. The Financial Times reported that although there were no concrete plans for management changes, the board was looking at Pandit's position.

The bank believes it has time to negotiate with the government, because depositors and derivatives clients are not showing any signs of fleeing the bank. Three hedge fund investors that spoke to Reuters on Friday said they continue to trade with the bank. The cost of protecting Citi's debt against default rose on Friday, but is still low enough to imply that investors are not worried about the bank making good on its obligations.

Some analysts believe that even if customers are standing by Citigroup now, they might shy away from the bank if the company's share price falls too much.

Sean Egan, analyst at ratings agency Egan-Jones Ratings, said, "Citigroup needs a deep-pocketed investor that is ready, willing, and able to step up in the next few days, and the only one who comes to mind is the government," adding that at least $50 billion may be necessary.

The bank is running ads in major U.S. and international newspapers on Sunday emphasizing its stability, noting that "200 million people around the globe have put their trust in Citi to take control and secure their futures."

THE INCREDIBLE SHRINKING CITI

Citigroup's market value fell to $20.5 billion on Friday. That's less than the $25 billion taxpayer-funded injection that Citigroup just received from the federal government, and a fraction of the $75 billion of capital that Citigroup has raised since the credit crisis began last year.