Calyon Securities analyst Mike Mayo, who can definitely move a stock, shocked Citi (C) shareholders with a report that noted the bank might write down about $10 billion in deferred-tax assets in the fourth quarter. A write-down of that magnitude would amount to nearly 25 percent of the $38 billion in deferred-tax assets on Citi's books, Mayo told investors. The street is still digesting the news.

The Motley Fool described these paper assets this way: When a bank incurs losses, the losses "can be offset against future earnings in order to reduce income tax expense. This is recorded as a deferred tax asset on the balance sheet, which contributes partially to the bank's Tier One capital. In order to create this asset, firms must estimate their future profits; however, if they go on to lower their estimates, they may be forced to write down the value of the deferred tax asset."

Of course other big banks have to grapple with the same issue, but Citigroup has the biggest potential liability. It had nearly $45 billion as of the end of the second quarter in net deferred tax assets vs. $29 billion for Bank of America. A "change of control" could also lead to a write-down of these assets. Citi recently held discussions with U.S. Treasury officials about this.

For more:
- here's the Motley Fool article

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