Just because shortcomings in generally accepted accounting principles permit the exclusion of some real economic losses doesn’t mean the numbers depict reality.  As the losses are real, Citigroup is still hemorrhaging (see: Citigroup Remains in Critical Condition).  We continue telling the saga, this time focusing on the capital of Citigroup.  As the income is falling and since the firm is not issuing significant amounts of common stock, its shareholders’ equity is also in decline.

Regulators, however, have created some odd adjustments to the accounting numbers to create what they call Tier I and Tier II capital.  Some adjustments are without foundation, while other useful adjustments are ignored, so it is doubtful that these regulated figures are useful.

Consider the following table taken from the 10Q of Citigroup, which displays the regulatory capital for December 31, 2008 and for March 31, 2009.

Regulatory capital eliminates items in accumulated other comprehensive income other than translation gains and losses when employing the all current method.  But, these items refer to real events with substantive economic impacts.  All items in accumulated other comprehensive should be included in the capital of the firm.

Regulatory capital subtracts out the effect of adjusting financial liabilities to the entity’s own credit worthiness.  As this aspect of FAS 157 is at best bizarre, we should eliminate its contribution to corporate capital.

Then some deferred tax assets are eliminated and some are not, and the basis for allowance or disallowance is subjective.  Why are some deferred tax assets removed but not all?  I would leave them in the mix, assuming that the valuation allowance is fairly computed.  However, since the valuation allowance may not be fairly measured, a more conservative approach is to subtract all deferred tax assets; besides, if the company enters severe financial distress or even bankruptcy, it might not be able to enjoy these deferred debits (Jon Weil also makes this point [ http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aQdj5yq_WnDI ], except if acquired by another entity that can use these deferred tax assets when filing a consolidated tax return.  More on this later.

Goodwill and some other intangible assets are deducted.  This is good inasmuch as goodwill cannot be sold to another company and perhaps the other intangibles cannot either.  I would eliminate all of the intangible assets and obtain a measure very close to tangible common equity.

In particular, I think regulators should look at tangible equity common adjusted for hidden gains and losses.  One item not on the balance sheet is unrealized losses on the held-to-maturity securities, and we shall adjust for that.  Thus, I obtain Citigroup adjusted capital for December 31, 2008 and for March 31, 2009 as follows.

	12/31/2008	3/31/2009
Stockholders' equity (reported)	141,630	145,927
Less; Preferred stock	(70,664)	(74,246)
Common equity	70,966	71,681
Goodwill	(27,132)	(26,410)
Other intangible assets	(14,159)	(13,612)
Tangible common equity	29,675	31,659
Losses in HTM portfolio	(4,088)	(7,772)
Adjusted capital	25,587	23,887
Deferred tax assets	44,500	43,000

The capital available to Citigroup when a crisis hits was only $25.6 billion as of December 31, 2008 and decreased to $23.9 billion on March 31 of this year.  This compilation presents a significantly different, but more realistic, picture of Citi’s capital to cushion any future financial shocks.

Notice that deferred income tax assets exceed these capital figures.  If indeed these deferred income tax assets do not materialize, then Citi is already technically insolvent.