Updated from 12:57 a.m. EDT

Citigroup ( C) is asking the Treasury Department for permission to pay special bonuses to many key employees, the Wall Street Journal reports, citing people familiar with the matter.

A separate report from the Financial Times says the bank has told U.S. regulators it could fill the capital shortfall identified by the government's so-called stress tests by selling large businesses, asking more investors to convert their preferred shares into common stock and reducing its balance sheet.

The Financial Times reports Citigroup is looking for ways to avoid receiving more government assistance if authorities insist on an increase in capital.

Citigroup executives argue that divestitures, such as the planned $5.2 billion sale of its Nikko Cordial unit to Sumitomo Mitsui, the possible expansion of an existing conversion offer, and cost-cutting would ensure it has enough capital to withstand the crisis, according to the Financial Times.

Shares recently were rising 7.6% to $3.11 on Wednesday.

People close to the situation said Citigroup could sell several units in Citi Holdings, the division that holds its non-core activities, the Financial Times reports.

Meanwhile, Citigroup's request to pay out the bonuses comes as the bank is dealing with government pay restrictions that could break apart Phibro, its energy-trading unit, the Journal notes.

Employees of the unit are threatening to leave because of pay caps tied to the U.S. bailout of Citigroup. Phibro has been the source of hundreds of millions of dollars in profits for the bank, and has paid out hefty compensation, including about $100 million last year to Andrew Hall, the unit's leader.

Citigroup is looking for ways to free Phibro from the federal restrictions, including a spinoff of the unit, the Journal reports, citing people familiar with the matter.

Hall has been agitating to leave Citigroup to avoid the pay curbs, people familiar with the matter said, the Journal reports.

Citigroup is trying to get U.S. approval for special bonuses for many of its employees. In a meeting with Treasury Secretary Timothy Geithner, Citigroup CEO Vikram Pandit made the case for the stock-based bonuses. Executives describe the bonuses as "retention" awards to perk up demoralized employees who the company worries are vulnerable to poaching by rival firms, the Journal reports.

A person familiar with Geithner's thinking said the Treasury hadn't made a decision on whether to allow the bonuses. It is unclear how much Citigroup would pay out in bonuses if the government approved the move.

A Citigroup spokesman declined to comment for the Journal on details of the proposed compensation plans.

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