The latest alterations Citigroup (C - Get Report) is reportedly seeking to its federal bailout may be aimed largely at an accounting measure that investors paid scant attention to until recently: tangible common equity.
Citi, according to published reports this week, is negotiating to convert some or all of the government's $45 billion preferred equity stake into common shares. The stock rallied, even though such a move would not give the bank any new capital and would dilute current common shareholders.
Converting the government's preferred stake into common stock would eliminate the 5% dividend Citi pays on the preferred shares, thus saving $563 million per quarter. But another significant advantage of the conversion is completely cosmetic. The new common shares would be counted as tangible common equity, which measures common shareholder's equity capital less goodwill (the accumulated premiums a company has paid for acquisitions) and other intangible assets.