Updated from 11:32 a.m. ESTCitigroup ( C) and the U.S. government reached a deal in which the government will raise its stake in the embattled bank. In a press release Friday, Citigroup said it will issue common stock in exchange for preferred securities, which the bank said will "substantially increase" its tangible common equity without any additional U.S. government investment. CEO Vikram Pandit, on a conference call Friday morning, said that based on the company's own conservative stress tests, the plan "should take capital issues off the table even in a stressed environment." "Like all financial services companies we still have to navigate through a tough environment but by putting this capital structure issue behind us once and for all we can lead from strength by focusing on our clients and building our business to maximize the earnings power of the company, which is ultimately what will allow us to rebuild the stock price," Pandit said. However, the immediate reaction for many investors was to flee. Citi shares closed down 39% to $1.50. Citi will 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, a 32% premium over Thursday's closing price of $2.46. The U.S. government will match this exchange up to a maximum of $25 billion of its preferred stock at the same conversion price. Other private investors will convert some of their preferred stock in Citi to common shares. The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among the private investors that said they would participate in the exchange.