A year ago, Citigroup had a market capitalization of over $137 billion.  At the start of business today, its value in the market is below $10 billion.  Citi stock tumbled to $1.95 last week as talk of more government aid and/or intervention ratcheted up.  Now, according to the Wall Street Journal, and others, Citigroup is in talks with the federal government about further moves to keep the bank afloat, and these talks could lead to the government "substantially expanding its ownership [of Citigroup]":

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.

Susan Woodward and Robert Hall use Citigroup's plight to illustrate how the U.S. Government might go about creating a "good" bank and a "bad" bank without fully splitting up a bank, thus keeping the bad bank solvent.  "The key idea", as Woodward and Hall write, crediting Jeremy Bulow, "is that the bad bank owns all of the equity in the bad bank."

The left column shows Citicorp’s balance sheet roughly marked to market. The company’s value in the stock market of $11 billion is $76 billion less than reported book equity value. We deduct that amount from the reported value of long-term assets, which is where the troubled real-estate related assets are most likely to reside.

The other two columns show the balance sheets of the new good bank and bad bank. The good bank will continue to operate under the Citi brands as a well-capitalized operating entity. The bad bank will be a financial fund with no operating functions.  The good bank gets the short-terms assets and the “other” assets because many of these are related to its operating activities. It gets the better half of the long-term assets, taken to have book value, while the bad bank gets the poor half, where the impairment has already occurred and suspicions of further price declines persist. The bad bank holds the valuable equity in the good bank to the tune of $427 billion.

Read Woodward and Hall's full analysis at their Financial Crisis and Recession blog here.