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Citigroup Bailout Changes Aimed at Accounting

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.

Troubled insurer AIG (AIG - Get Report) reportedly is considering a similar move.

In an environment of uncertainty, tangible common equity gives the common stockholders an idea of what their stake is actually worth. It provides the most conservative estimate of the value of the common shareholders' stake in the company. With the government a major investor in many of the larger banks, the Federal Reserve is expected to emphasize tangible common equity in the " stress tests" it intends to use to determine which financial institutions are worthy of government aid going forward.

But there are other, more traditional ways to gauge capital adequacy.
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