U.S. Could Take Larger Stake in Citi: Report

Updated from 12:20 a.m. EST

Citigroup's (C) investors may be relieved that the banking institution is not being fully nationalized, but that doesn't mean the company won't suffer from being under tighter government control.

The Wall Street Journal reported late Sunday that the company is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the bank to as much as 40%, citing people familiar with the situation.

In its proposed plan to regulators, Citi executives hope the stake will be closer to 25%, these people said, the Journal reports. But there is the possibility the talks could fall apart, the Journal adds.

Shares of Citi jumped as high as 27% on Monday, before closing up 9.7% to $2.14. Investors seemed calmed by the fact that a larger government equity stake "could be a better outcome than a full nationalization as some have feared," Jason Goldberg, an analyst at Barclays Capital, wrote in a note.

Still at it current stock price, Citi has just two choices -- nationalization or additional government intervention, says Morningstar analyst Jaime Peters. "[T]here seems to be zero way that the company can make it on its own [with] its current stock price," she says.

"The positive is going to be a firmer capital base, which should in turn induce more customer confidence" in the company, she says. "That seems to be the only major reason to do this."

Still, "there is a difference between a 40% stake and actual nationalization," Peters says. "This is not nationalization." Rather, the government is taking baby steps toward nationalization in hopes that the economy will stabilize before it is forced to do so, she says.