People walk outside Citigroup headquarters in New York City.
People walk outside Citigroup headquarters in New York City. - 
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Bob Moon: So the country's big banks are working out their balance sheets and getting ready for their turn on the Treasury's treadmill. But not Citigroup. It's decided to skip the test and go straight to intensive care. Last night the bank went to the government and admitted it needs what amounts to a heart bypass in the banking world. It's the third time in six months that Citi's gone under the government knife -- or at least asked for a transfusion.

Ashley Milne-Tyte reports on why the bank needs surgery this time, and what form the operation could take.

ASHLEY MILNE-TYTE: Citigroup's problems are a good example of what banks could face if they fail the Treasury's stress test. Bart Narter is head of the banking group at consulting firm Celent. He says Citi was already in trouble, but the faltering economy has put it in danger of collapse.

BART NARTER: I think as part of the TARP program Citi was forced to "stress test" their portfolio and re-examine it and I think when they reexamined it they got some surprises.

Think of a bank's balance sheet like a see-saw: On one side is all the money the bank owes: to bondholders, to other banks and creditors. On the other side are its cash, or equity, and its assets. Because many of those assets -- like those infamous mortgage-backed bonds -- are worth little or nothing the see-saw is way out of balance.

To level things up, Citi needs more cash. And the $45 billion in Citi-preferred stock that the government owns could be the solution. Peter Cohan is a consultant who writes widely about banks. He says right now that preferred stock is structured almost like debt. If it converts to common stock, it turns into an asset for Citigroup.

PETER COHAN: They reduce the debt and they boost up the tangible common equity, which makes it possible for Citi to have a much stronger balance sheet from the perspective of the regulatory requirements, particularly in light of these stress tests.

Converting to common stock would mean the taxpayer wouldn't have to pay any more money. At least for now. Tom Higgins is chief economist at Payden and Rygel Asset Management. He says there's only one word for this...

TOM HIGGINS: The government doesn't want to call it "nationalization" but effectively that is the direction that we're moving in.

And that could mean we'd be stuck owning a large chunk of a bank that might never recover.

In New York I'm Ashley Milne-Tyte for Marketplace.