In a move which sent Citigroup (NYSE: C) shares plunging, the Treasury Department has announced that after consultation with the bank, it has decided to covert up to $25 billion of the preferred shares it was issued under the Capital Purchase Program into common stock. That will take the governments stake in the embattled bank up to 36 percent, though considering the amount of capital the government’s pumped into the bank, the stakes small potatoes since the government’s already bought it three times over.

The move’s interesting for two reasons: First, it will bolster the banks tangible common equity ratio (TCE), which has become a key metric in Geithners’ stress test regime.

TCE has always been a measure used to judge a banks’ capital strength. It basically ignores intangible assets such as goodwill is a “pure” measure of common equity – essentially a banks book value.

Until recently though, it’s been largely ignored in favor of metrics such as Tier 1 capital, which theoretically measures a banks risk-based capital. It essentially tells you how much risk the bank is taking with its cash; the higher the Tier 1 capital number, the less risk the bank has on its books.

The problem has now become that with all the cash flowing through the TARP and all the other capital infusion programs, the Tier 1 measures for banks taking bailout money is completely out of whack in most cases. Many banks, even some of those in the most dire straits, look attractive from a Tier 1 perspective even though in reality, if the government cash stopped flowing, they probably couldn’t last a day.

That’s brought TCE back into vogue as a key measure of bank strength and it’s interesting that Geithner has chosen to focus on it, given that Tier 1 is still a key metric regulators use in determining bank solvency.

With the focus now on TCE though, getting out from under paying dividends and getting that huge block of preferred shares off its balance sheet, Citigroup’s TCE ratio will be vastly improved. In that regard the move seems slightly contrived, geared towards keeping the bank solvent and out of liquidation. I somehow doubt all the other TARP banks will get the same consideration.

I’m very interested to see if this makes the good folks over at the FDIC, who are doing an admirable job by the way, rethink their decision making process. In my mind, the Treasury Secretary choosing to use a different measure of bank health kind of calls into question operations at other regulators.

It will be interesting to see what comes of the meeting of the minds which is supposed to take place after the stress tests. While a reformed regulatory process is a foregone conclusion at this point, I wouldn’t be surprised if it’s totally revamped.

This whole saga is interesting on another level as well. The board of directors at Citi is looking to be almost completely reconstituted with the majority of new directors being independent. To me, this shouldn’t have been an issue to begin with because the majority of the board should have been independent from the get-go. No one would have tolerated the kind of concentration of power that you saw at Citigroup at mid-sized banks, though it’s not that uncommon at smaller institutions.

But when you’re a major money center bank, and for a time the largest in the nation, that’s just not acceptable under any circumstances. I not-so-secretly hope that Pandit’s shown the door as well because while he did inherit a less than ideal situation, in a lot of ways he’s just made a bad situation worse.

Citigroup has also said that it is suspending its dividend on both its common and preferred shares, made possible by the fact that the government won’t be holding a large block of preferreds.

While no one in the mainstream media seems to be calling attention to this fact yet, I see this as the opening gambit towards a true nationalization or “preprivatization” program. I don’t think these are moves that would have been made independently or willingly by Citigroup and I suspect they’re a result of their new largest shareholder flexing some muscle.

And it’s about time. According to the FDIC’s just released Quarterly Banking Profile, the industry reported its first net quarterly loss since 1990 have had to write-off massive trading losses and write-down goodwill. Provisions for loan losses are more than double what they were a year ago as the number of noncurrent loans has risen by more than 23 percent and net interest margin has fallen to a 20-year low, meaning profitability at most institutions just isn’t a realistic expectation for some time to come. And while all of this is going on, the industry’s reserve coverage ratio has fallen to a 16-year low.

That’s the long of it, and the short of it is that we’re going to see many more bank failures over the course of the year even as they’ve already risen to a 15-year high.

Interestingly enough though, total assets at insured institutions rose by $250.7 billion, or 1.8 percent, which I suspect is entirely due to more folks hanging on to cash. Total deposits rose by $307.9 billion, or 3.5 percent. That growth has set what can be a very positive trend into motion, with deposit growth outpacing growth in total assets, with deposits funding more than 65 percent of industry assets in the fourth quarter. That’s a solid first step to a healthier industry.

A final interesting tidbit from the report is that net loans and leases fell by 1.7 percent in the quarter, with three large banks accounting for the entire decrease. Most other banks actually grew their loan portfolios in the quarter.

That’s clear proof that the problem right now isn’t a lack of credit, though admittedly it’s harder to come by, but a lack of demand for credit. Businesses aren’t going to be keen on taking out loans to expand in this weak economic environment and no individual in their right mind would take out a loan not knowing what their job situation will be next week.

That makes it all the more critical that the recently passed economic recovery measures actually work, keeping and creating American jobs, and that regulators stop sitting on their hands on the bank situation. But we’re taking positive steps towards a recovery and I for one am waiting with baited breath to see the outcome of the “stress tests.”

As is usually the case, Yiannis Mostrous looks to opportunities in Asia in this week’s issue of Growth Engines and give a few of his best picks in the region.

“It’s now clear that the financial crisis has turned out to be greater than most policymakers expected and much bigger than politicians ever imagined. Considering, however, the lack of imagination most politicians share, this isn’t too worrisome. The latter are still running around trying to find new ways to regulate assorted industries.”

For now, the world awaits the elusive “acceptable term” to describe the taking over (partially or not) of a business by the government. The delirium among certain debaters has reached such heights that “nationalization” is confused with “nationalism,” and so many important people remain at a total loss as to how to proceed in solving the banking problem.

We’ve reached the point, therefore, where Citigroup (NYSE: C) is “negotiating” to offer up a 40 percent stake in itself to the government in return for taxpayers’ money. This, after the government has already injected a sum greater than the company’s market capitalization.

As absurd as the whole situation looks, though, a solution will eventually be reached. At that time, the global stock markets may be in for a good relief rally that could take the indexes up 20 percent.

When it comes to Asia, there’s still the possibility that markets will retest their lows. But any pullback is an opportunity to add some beta excitement to your portfolio, as overly defensive allocations won’t perform as well this year. The economic data has deteriorated so much and so fast that any stabilization should be viewed as a big positive.

Asian markets now trade at valuations below those of other recession periods, yet investors remain extremely negative and unwilling to buy growth. This combination will allow prudent bargain-hunters to position themselves for the next cycle. Asian markets will lead the next leg up, as structural improvements fuel recovery.

My long-term bullishness on Asia is summed up in two simple words: economic change. Global economic leadership changes over time, and the world has now entered such a period. In coming years, Asia will emerge as the global economic growth leader, and the West will enter a more subdued cycle.

Time will test everybody’s theories, but history has shown that in the aftermath of calamitous economic/market bottoms the world and its societies have profoundly changed. I expect this to be the case this time around, too. I don’t subscribe to the theory that after all is said and done, things will go back to the status quo.

Now is the time to introduce some cyclicality to your portfolio.

Lonking Holdings (Hong Kong: 3339, OTC: LONKF) is one of the largest wheel loader manufacturers in China. The company owns two production bases, one in Shanghai, the other in Fujian. It also produces and sells forklifts and road rollers, and it recently developed an excavator business and acquired a harvest machinery business.

Lonking’s main disadvantage is that it relies on a single product, with close to 80 percent of revenues coming from loaders. But loaders are the most vital machine at the beginning of a construction project, tying Lonking’s main product tightly to any government infrastructure efforts.

On the operational side, Lonking’s margins are higher than its competitors, and it also has less debt. Its shares are trading at a deep discount to the competition at a time when infrastructure has become China’s priority.”

For the last two picks, click here.