According to WSJ, Citigroup (C) is in talks with regulators that could result in the U.S. govt expanding its ownership of the struggling bank to as much as 40%. Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the govt would convert into common stock. The govt obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into the bank. WSJ, citing people familiar with the situation, said Citi’s execs are hoping the stake will be closer to 25%. (C) has dropped more than 70% so far in 2009.