Nov. 24 (Bloomberg) -- Over and over, as its stock price plunged last week, Citigroup Inc. repeated the same tired line. Citigroup has “very strong capital,” the bank kept saying.

Its capital was so strong that the New York-based lender yesterday was ironing out yet another federal bailout. One lesson here is: There’s something very wrong with the way Citigroup and the government measure capital.

To see why, let’s dig into just one portion of Citigroup’s capital that has been soaring in value this year. It’s called deferred-tax assets, or DTAs, which now make up a big part of Citigroup’s book value and Tier 1 regulatory capital.

You won’t see anything about these assets’ values in Citigroup’s third-quarter report to shareholders. The bank buried them on its balance sheet in a line called “other,” and it discloses them in its financial-statement footnotes only once a year. You can piece together how much the values had grown, though, from Citigroup’s filings with the Federal Reserve Board.

Deferred-tax assets typically consist of tax-deductible losses carried forward from prior periods, which companies can use to offset future tax bills. Under generally accepted accounting principles, such carryforwards are valuable only to companies that are profitable and paying income taxes.

To the extent a company doesn’t expect to use these assets, it’s supposed to record an offsetting valuation allowance to reduce their value. DTAs also can take the form of carrybacks, which let companies claim refunds of past taxes paid.

$28.5 Billion

As of Sept. 30, Citigroup’s net DTAs were about $28.5 billion, after subtracting deferred-tax liabilities. That represented 29 percent of the bank’s common shareholder equity and a whopping 80 percent of tangible equity, which excludes goodwill and other intangible assets. On a gross basis, DTAs were even bigger; the bank hasn’t disclosed how much.

By comparison, Citigroup’s stock-market value finished last week at $20.5 billion. The longer Citigroup goes without chopping its DTAs, the more investors should be wary of any of its numbers.

Under the Fed’s rules, the only way DTAs that depend on future income can be included in Tier 1 is if a bank expects to use them within 12 months. Even then, the Fed says they can’t exceed 10 percent of a bank’s Tier 1 capital. There’s no such limit on carrybacks.

Citigroup excluded $10 billion of DTAs from its Sept. 30 Tier 1 measure. That means about $18.5 billion, or 19 percent, of its $96.3 billion of Tier 1 capital consisted of DTAs at the end of the last quarter.

‘Future Taxable Income’

As of Dec. 31, 2007, Citigroup’s DTAs were $13.6 billion, net. On a gross basis, the bank’s annual report showed $22.2 billion, with no valuation allowance. At the time, Citigroup said it expected to realize all its DTAs, “based on existing carryback ability and expectations as to future taxable income.”

Citigroup included all $13.6 billion of the net figure in its $89.2 billion of Dec. 31 Tier 1 capital. So, because of the 10 percent rule, we know at least some of the $13.6 billion should have been carrybacks.

Here’s where it gets weird. None of the assets listed in Citigroup’s Dec. 31 footnote on DTAs looked like carrybacks, says Robert Willens, a tax and accounting consultant who teaches at Columbia Business School in New York. To ballpark how much Citigroup has in potential carrybacks, he suggested looking at the company’s federal tax provisions for 2007 and 2006.

In the U.S., carrybacks generally expire after two years. Citigroup’s federal tax provision for 2007 was negative, meaning the bank recorded a tax benefit, rather than an expense. Its federal provision for 2006 was just $3.9 billion.

‘Optimistic’ Income

“They still have to be projecting a tremendous amount of taxable income,” Willens told me. “That’s the thing that seems optimistic.”

Whatever amount the carryforwards were on Dec. 31, it looks like Citigroup won’t be able to use any of those this year, because the company won’t be profitable. In hindsight, that means Citigroup got it wrong when it estimated for Tier 1 purposes that it would use them all within 12 months.

My guess is Citigroup can’t rely on ever being profitable again, in which case the bulk of its DTAs are worthless. A Citigroup spokeswoman, Shannon Bell, declined to comment.

Now look at some of the other fluff in Citigroup’s $96.3 billion of Tier 1 capital, as of Sept. 30.

-- The Tier 1 figure included $23.7 billion of so-called trust preferred securities issued by Citigroup, which are treated as debt under GAAP.

-- About $27.4 billion was preferred stock, which is debt from a common shareholder’s standpoint. (Citigroup raised an additional $25 billion from the government last month in exchange for preferred stock.)

Little Capital

-- The Tier 1 measure excluded $10.8 billion of paper losses on various securities and derivatives, even though these reduced GAAP equity. It also included $12.7 billion of intangibles.

So, in truth, Citigroup had little, if any, real capital, even if the values for all its toxic loans and mortgage-related investments had been accurate. Most of the above-listed items won’t help the bank absorb losses. Rather, they are the kinds of things that cry out for more capital.

What we need from America’s banks is for their leaders and regulators to start speaking with credibility.

We’ve had enough funny numbers.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

Last Updated: November 24, 2008 00:24 EST