The government has already loaned Citi Group a ton on money. Now, it is considering taking common stock in exchange. Here is the supposed reason as suggested in the Washington Post:
"Many investors concluded that the government money did not count as part of Citigroup's capital reserve against future losses, because the investment looked like a loan. The company was required to issue the government shares of preferred stock, which carried an interest rate that spiked after five years to encourage repayment.
By allowing Citigroup to issue common shares to replace those preferred shares, the government hopes to convince investors that the company has a sufficient capital reserve to survive its problems."
If the FED changed its rule requiring that loan losses be a charge against capital, the above would not be necessary.
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