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Would 40% in Citigroup Be Enough?

Shares of Citigroup jumped nearly 10 percent Monday, as investors seemed to take comfort in reports that the United States government may raise its stake in the troubled lending giant to 25 percent to 40 percent.

But some think that even this dramatic move wouldn’t be nearly enough to stabilize Citi, whose

shares have been in a dizzying downward spiral lately.

To put Citi on firm footing, David Trone, an analyst at Fox-Pitt Kelton, estimated in a research note Monday that the government would need to inject a lot more money in Citi, and take a much larger stake, than it seems to be considering.

Citi has already gotten plenty of cash from the United States government: $45 billion in two rounds of aid, a figure that doesn’t include loan guarantees and other financial backstops.

But Citi still has a problem, according to Mr. Trone, in the financial ratios that investors seem to be looking at these days to gauge bank health.

Up until recently, the ratio that seemed to get all the bank stocks moving was the amount of Tier 1 capital it had as a percentage of total assets.

Now, the market seems to be fixated on a bank’s tangible common equity, or TCE, which is a bank’s assets minus all its liabilities and, most importantly, all of its preferred shares and intangible assets like goodwill, brand names and patents. This essentially shows what common shareholders would get if the company were dissolved.

With all the talk of nationalization and common shareholders being wiped out, it’s no wonder that investors are holding the TCE ratio in such high esteem these days.

The government’s injections so far have not helped to pump up this ratio: It has been buying preferred shares, which increase a bank’s Tier 1 capital but does nothing to increase its TCE ratio.

Mr. Trone says Citigroup’s TCE ratio is so low that it needs a lot of cash to get to the 3 percent to 5 percent range, which is where banks’ TCE ratios historically stood before the credit crisis began last year. Because of all its losses and its tanking stock price, Citi’s ratio is currently about 1.87 percent.

To get to 40 percent ownership stake being reported, the government would need to be issued $5.5 billion worth of new Citi common stock. That would only increase the TCE ratio to 2.16 percent, Mr. Trone said.

To get Citi to a 4 percent TCE ratio, the government would need to be issued $40.4 billion in stock — enough to give it a 79.5 percent stake in Citigroup. In that scenario, current Citi shareholders would be diluted by a whopping 77 percent, Mr. Trone calculated.