Citigroup Inc. (C) with the U.S. Treasury Department on Friday announced it would exchange common stock for the preferred securities obtained by the Treasury through the Capital Purchase Program (CPP), effectively increasing the government's share of the company to 36 percent. The transaction was designed to increase Citi's tangible common equity and restore investor confidence "without any additional U.S. government investment," the bank said. The offer to exchange common stock for preferred securities will also apply to other preferred holders, up to $27.5 billion of Citi's existing preferred securities, at a conversion price of $3.25 per share. The Treasury said it had agreed to convert its security to match the private preferred exchanges dollar-for-dollar, to convert up to the $25 billion of preferred stock issued under the CPP, and that it would "receive the most favorable terms and price offered to any other preferred holder through this exchange." The Treasury also said any remaining preferred issued under the Targeted Investment Program and Asset Guarantee Program would be converted into a trust preferred security "of greater structural seniority" with the same 8 percent cash dividend rate inherent in the existing issue. Citi first in October received $25 billion through the CPP; then in December it received another $20 billion through the TIP. In mid-January, the Treasury pledged up to $5 billion as its portion of the government AGP. Despite the handful of lifelines tossed to Citi, the bank announced in mid-January it would reorganize into two businesses after suffering $18.7 billion in fourth-quarter losses. It seems not enough could be done to prop up investor confidence in the bank, which also announced Friday it would begin a major overhaul on its board of directors, building a majority of "new independent directors as soon as feasible." Citi stocks were down as much as 37 percent in early trading Friday after the announcement shook investors and rekindled doubt in the U.S. banking system outside of nationalization -- or at least partial government ownership. Write to Diana Golobay at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.