(By Mayur Pahilajani - iStockAnalyst Writer)

(Washington, D.C.) - Chief Executive Vikram Pandit of the ailing Citigroup Inc. (NYSE: C) may stop scrambling for capital, at least for now, as U.S. Treasury Department decided to convert a big chuck of its preferred shares, increasing the level of risk on the U.S. taxpayers’ dollars.

But Pandit is sinking into quagmire as the part of the government’s deal involves convincing private investors to swap their holdings for riskier common stock. Without the completion of this condition, Citigroup will be back to square one, forcing its board to question Pandit’s future in the company.

Some experts believe that it may not stop the speculation that the government may nationalize banks as a last resort. “This is another step toward creeping nationalization,” Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, told Bloomberg Radio. “This country is going through no less than an economic revolution,” said Levitt added.

Citi's Tier 1 capital ratio is 11.9 percent as of December 31, 2008, and the ratio is not impacted by this transaction, the firm said.  In a separate statement, Citigroup announced that it recorded a pre-tax goodwill impairment charge of approximately $9.6 billion ($8.7 billion after-tax) in the fourth quarter of 2008.

The government has already infused $45 billion in preferred shares and provided a guarantee on $306 billion in troubled assets, which also seems to have failed to restore investor confidence in the company. Under the latest deal, the Treasury has decided to convert up to $25 billion in preferred shares to common.

If the transaction between the two parties is completely executed, the U.S. taxpayers will own 36 percent of the New York-based firm's shares. But it would also mean that the existing shareholders' stake would be wiped out to almost 26 percent.

Although transaction does not increase the amount of Treasury's investment in Citigroup, the level of risk is higher as the conversion to common stock cuts the firm’s fixed-cost burden. With the deal, Citigroup will not be required to payout high fixed-price dividends for preferred shares.

Citigroup will also offer to exchange common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 a share to private investors. The U.S.