WASHINGTON -- The Obama administration could end up with more direct control over some of the nation's largest banks as policy makers consider converting the government's preferred stock in these companies into common equity.

Such a move, which would come after the administration's so-called stress tests are completed in early May, could give the Obama administration more financial breathing room as it tries to safeguard funds remaining from the original $700 billion Congress allocated last October to stabilize the banking sector. Less than $200 billion remains unallocated in the fund.

It could also raise a host of thorny questions about government control over private companies, which has caused a firestorm in Washington this year as the government has exerted influence over banks receiving government capital.

News of the possible conversion of the government stakes was reported Sunday night on the New York Times Web site.

Converting the investments would directly improve the capital footing of weak banks but it would also enhance the public's stake in these companies, inching them closer to a type of nationalization.

The Obama administration has long said it retains the option of converting existing investments into common equity, a tool it is using to shore up Citigroup Inc. It is unclear how many of the 19 banks undergoing the stress tests might need more capital and of those how many could see such conversions.

Not all the 19 banks are expected to need more capital and some are moving quickly to return the government's original investment.

To shore up confidence in the banking sector, the Treasury Department announced a plan in February to conduct "stress tests" on the U.S.'s largest banks to measure a bank's ability to continue lending under distressed economic conditions. If the tests determine a bank needs more capital, the company will have six months to raise additional money from private investors.

Bank holding companies can apply to the government for funding right after the stress tests are complete "to provide certainty of access to the program, but delay funding for six months in order to have the opportunity to raise as much private capital as possible," the Treasury Department said last month.

Bank holding companies will have access to government capital in the form of "mandatory" convertible preferred shares, which means the investment could be moved into common stock.

It is also possible banks could request that existing government investments be converted into common equity. This would make it easier for the government to bolster the financial footing of these companies without allocating any new money.

The Obama administration has said it would consider taking a more activist role with financial companies that receive an "exceptional" amount of government assistance, including possibly removing management or board members.

Converting stock would help banks because investors are paying more attention to the "tangible" common equity each bank holds as opposed to the "Tier 1" capital ratio that regulators have historically relied on as a measure of solvency. Tangible common equity ratios don't take into account the preferred stock investments that the government has made.

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