Bank of America Corp (BAC)

[WID]

The Journal noted that some key details of the agreement remain unclear, including the price at which the government will convert the preferred shares to common stock. Reportedly, people briefed on the discussions told the Journal that Citigroup was asking regulators to convert at a price of as much as $5 a share -- twice the bank's closing stock price on Thursday.

Representatives from Citigroup could not be reached late Thursday for comment on the report.

Earlier this week, as reports of the possibility of the Treasury taking a bigger stake in the bank surfaced, Stuart Plesser, a financials analyst at Standard & Poor's Equity Research, told investors that converting the government's preferred equity stake into common stock "would help boost the company's low tangible equity ratio (currently 1.5%), which we believe is too low given Citi's asset base."

"Such a move would be more psychological than tangible, as no real capital would be added to Citi," he added. "But it might help ease investors' concerns over the banking space."
In recent months, investors have focused more on tangible common equity ratios to measure banks' financial strength.
This shows what common stock holders would theoretically get if an institution was shut down and its assets sold.

The ratio is more conservative that the Tier 1 capital ratio, which is used by regulators and banks. This ratio counts preferred securities as equity, as well as common shares.
In Citigroup's case, its tangible common equity ratio was 1.5% at the end of 2008, well below the 3% level that investors consider safe, the Journal said on Monday. The bank's Tier 1 capital ratio was 11.8%, well above what regulators consider well capitalized, the newspaper noted.

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