Citigroup declined to comment on the Journal report.
Fears of bank nationalization have grown in recent weeks as investors fret about possible takeovers of some of the nation's most troubled banks. Exactly how a potential government takeover could be shaped has concerned investors since few details of additional potential support for the industry have emerged, fueling the recent sell-off.
Under the reported government plan for Citigroup, current shareholders' stakes would be diluted - but not wiped out completely - a scenario that would likely happen if the government completely takes control of the bank.
The plan would not pump addition cash into New York-based Citigroup, which has already received $45 billion in capital along with guarantees to cover losses on hundreds of billions of dollars in risky investments and loans from the government amid the ongoing credit crisis. The potential move would also not mean the government completes a full takeover of the beleaguered bank, which has been among the hardest hit by rising loan defaults and sinking values of some of its investments.
The plan for Citigroup cited by the Journal isn't as drastic as a full government takeover. If the U.S. moves ahead with the plan to convert its preferred stock in Citigroup into common stock, it could provide a blueprint for moves at other banks.
Though declining to specifically discuss a potential deal with Citi, Treasury Department spokesman Isaac Baker said banks can apply to convert the government's preferred stock to new convertible stock that can be turned into common shares at the option of the bank.
"We are open to considering a request to do so if the institution and its regulator believe it would promote the long term stability of that institution, and if we believe it's in the best interest of long-term stability of our economy and financial system," Baker said.
Shares of New York-based Citigroup jumped 37 cents, or 19 percent, to $2.32 in premarket trading Monday. On Friday, shares of Citi fell 22 percent on increasing fears the bank might be fully taken over by the government.
Citi shares have tumbled for seven straight trading days, falling 47 percent during that stretch. The shares have already lost 71 percent of their value since the beginning of the year.
Citi has actively been working to cut expenses and sell assets as it tries to return to profitability. The bank has posted five straight quarterly losses, including a fourth-quarter loss of $8.29 billion. It is also splitting its operations, separating its traditional banking businesses from riskier operations.
Bank of America Corp., which like Citi has received $45 billion from the government and guarantees on a portion of risky assets, is also among the banks investors fear could succumb to a government takeover.
But like Citi, shares of Charlotte, N.C.-based Bank of America rose in premarket trading Monday, gaining 60 cents, or 15.8 percent, to $4.39.
Shares of other banks also rose Monday. Wells Fargo rose 77 cents, or 7.1 percent, to $11.68, Goldman Sachs Group Inc. rose $2.12, or 2.5 percent, to $86.71 and Morgan Stanley climbed $1.07, or 5.5 percent, to $20.50.
On Friday, government officials sent mixed signals about the possibility of the government taking over some banks. A spokesman for President Barack Obama tried to downplay potential nationalization talk, while Sen. Christopher Dodd, D-Conn., said some sort of nationalization might be needed on a short-term basis.
In a research note released Monday, Friedman, Billings, Ramsey & Co. analyst Paul Miller said markets are "increasingly factoring in some sort of nationalization of the banking sector," but that while the move might be a "scary proposition for investors," it is likely to provide the quickest and cheapest option to help rid banks of bad assets and recapitalize them.
"We believe the quickest and lowest cost solution is for the government to close down troubled financial institutions, regardless of size, extract the toxic assets, and sell the good portions of these financial institutions to private investors as quickly as possible," Miller wrote in the note.
A similar scenario played out last fall when the government took over Washington Mutual Inc., and quickly sold its strong deposit franchise and other healthy businesses to JPMorgan Chase & Co.
Fox-Pitt Kelton analyst David Trone wrote in a note to clients that nationalization of Citi would likely have negative consequences for the bank that could hurt its earnings power, growth and profitability.
Trone worries a significant government stake in Citi that leads it to "meddle in Citi's operations and strategy" would scare away potential customers and employees. That in turn could make it unprofitable and thus more difficult to sell back into the public markets, Trone wrote in the note.
FBR's Miller said the duration of government control of any bank would have to be limited, with the largest financial firms being held for about six months to a year at most, in an effort to expedite a turnaround in the industry.
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AP Economics Writer Martin Crutsinger in Washington contributed to this report.
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