Mark Sunshine

Tangible Common Equity: How Much Is Enough?

Bill,

I am in favor of all of your suggestions. The converstion of Morgan and Goldman were desperation measures. Now the Fed needs to regulate them as bank holding companies and make sure that they have adequate amounts of equity and are safe and sound. I don't see a lot of evidence of that happening but then again I can't prove that it isn't happening behind closed doors. Being a bank holding company and getting Federal help has benefits but there are responsibilities as well and the Fed should be making sure that these institutions hold up their end of the bargain.

As for ratios requiring permenant capital, shockingly there are some but for some reason on a holding company level no one seems to care (not the markets, not the regulators, not the media).

I am a reasonably frequent guest on FOX and Bloomberg and for months in 2008 only talked about TCE (and was either ignored or made fun of). But, by when analyizing banks and whether or not they are risky everyone should start by looking at TCE ratios. Those ratios don't say whether or not there is a good business, whether or not they are making money, or whether or not one should invest, but the TCE ratio is a good proxy for balance sheet risk. If everyone starts with TCE they will find that they are able to predict what happens to the banks almost as well as Meridith Whitney.

As an aside and in respose to another comment, risk weighted assets are important but it still all starts with TCE ratios. As an example, assume a bank is totally core deposit funded and only buys Treasuries (i.e., no funding or credit risk). The bank still needs to have adequate TCE because of market risk (yes, off the run Treasuries have some market risk) and interest rate risk (the interest rate risk can be high if the Treasuries are Treasury strips, high coupon or low coupon and even on the run Treasuries have interest rate risk). Same with Freddie/Fannie pass throughs - lots of market and interest rate risk. And, the bank has operating risk, i.e., the risk that managment makes a mistake and doesn't hedge market risk or interest rate risk well or has a law suit or other problem. All of these risks require TCE. Running a bank on 20 to 1 leverage makes no sense to me even if the bank has 0% credit risk.

And, for the people reading this blog and accused me of trying to dump the stocks because I am short, I have neither a long or short position in the banks. For a lot of reasons relating to my employment and my wife's employment I don't own individual stocks and only own mutual funds that are generic in nature. And, I don't expect nasty comments from anyone on the fact that I am prohibited from owning stocks yet commented and wrote an article. The chart was meant to be "industry generic" not particularly company specific.