Financials in particular will have to continue pinching pennies, especially in the wake of the Federal Reserve’s much vaunted stress tests. Of the 19 institutions put through their paces, 10 came up light on capital under the projected worst case scenario. Based on the estimates released, the 10 financials will need to raise about $75 billion.

The weak institutions have two basic options to bolster their balance sheets: additional government loans or secondary offerings. Selling additional shares could be problematic because some institutions will have to raise the equivalent of a third or more of their current market caps. Current shareholders would suffer heavily in the event of such a dilutive offering.

Additional government funding could face political roadblocks. The American taxpayer is ill-disposed to provide more loans to troubled banks, and politicians will be reluctant to appear too easy on an industry viewed with such disdain by the voting public–after all, midterm elections aren’t that far away.

The real risk at this point is that the government will attempt a bit of accounting alchemy, converting its preferred shares into common equity.

Common equity is considered a bank’s first line of capital defense against losses; unlike preferred stocks or bonds, banks can opt to cut or even eliminate dividends and other distributions to stockholders in order to conserve capital.

If a bank goes that route, while there are potentially severe ramifications for share prices, there’s no default risk or obligation to make back payments.

Common shareholder equity is a key component of calculating Tier 1 risk-based ratios and, as the Federal Reserve points out in its report, Tier 1 common capital is where most of the banks are coming up short. That makes common equity a key factor in determining capitalization ratios and establishing whether a bank is solvent. But while a conversion will make a bank appear stronger on paper, for practical purposes it does little to solve the problem–no new money changes hands.

Investors seem heartened by the news, so there’s always the possibility that improved confidence will lift the banks out of their troubled position.

The major upside to the crisis is that it has created opportunities for contrarian investors, with many solid institutions priced as toxic assets. Identifying the opportunities will take time and research, but the effort could pay off in coming months.