Citigroup said Friday it had reached a deal that will give the U.S. government up to a 40 percent stake in the struggling bank.

The company also said it had recorded a goodwill impairment charge of about $9.6 billion due to deterioration in the financial markets.

The increase in government ownership will not require additional taxpayer money. The government currently holds about an 8 percent stake in the New York-based bank.

One of the hardest hit banks by the ongoing credit crisis, Citi has already received $45 billion in cash from the government and guarantees protecting it from the bulk of losses on $300 billion of risky investments.

In return for the desperately-needed monetary lifelife, the troubled banking giant was also expected to make changes on its board, and to meet other conditions, according to a person with knowledge of the discussions who spoke to the Associated Press before the deal was announced.

The bank will still have to undergo a “stress test,” such as those that banking regulators started conducting this week on the nation’s biggest banks, said the source, who spoke on condition of anonymity because the deal hadn’t been officially announced at the time.

The government will convert some of its preferred shares in Citigroup to common shares, and the bank will, in theory, get private investors to do the same, the source said.

Converting the preferred shares to common stock will help bring Citigroup closer to the mix of capital that the government will want to see when it conducts the stress tests.

The stock-conversion option was laid out by the Obama administration earlier this week as an option for providing relief to banks. It gives the government greater flexibility in dealing with ailing banks. It also gives the government voting shares, and therefore more say in a bank’s operations.

Federal Reserve Chairman Ben Bernanke on Wednesday spurned speculation that the government might nationalize Citigroup or other large financial institutions.

During an appearance before the House Financial Services Committee, Bernanke said nationalization, “is when the government seizes the bank and zeros out the shareholders and begins to manage and run the bank. And, we don’t plan anything like that.”

But, predicting the announcement expected on Friday, the Fed chief did say it was possible the government could end up with a much bigger ownership stake in Citigroup or other banks. In the case of Citigroup, Bernanke said “we’ll see how their test works out and what evolves.”

(Source: CBS2 HD)