The market seems to only care about how much tangible common equity(TCE) that the government will require the banks to have, believing that whatever that number is, will be sufficient to ride out the rest of the recession. Bloomberg reports today that:
“Officials favor tangible common equity equal of about 4 percent of a bank’s assets, up from a 3 percent goal earlier in the process, two people with knowledge of the deliberations said last week”
Below, we show Rolfe Winkler’s calculations of big bank TCE’s as of March 31:
As can be seen, if the TCE is required to be 4% rather than 3%, then Winkler’s numbers indicate that JP Morgan Chase and US Bancorp will also have to increase TCE. We have previously posted on FASB’s new requirments to bring off balancesheet assets back onto the balance sheets next year. Once those assets are included in the TCE calculations, none of the banks listed will have TCE of 4%. Lately, much has been written indicating that Citigroup has been asked to raise another $10B in capital. Using Winkler’s numbers, Citigroup would need to have 4% of $1732B in assets or $69B in TCE. Even accepting their own stated TCE of $30B (rather than Winkler’s $24B), Citigroup would need to raise TCE by $39B – not just $10B and common equity would need to be diluted by 2.5 to 1. Is that already discounted into Citigroup’s stock? What about FASB’s new requirement? Further Mark Sunshine argues that TCE of 4% was insufficient in the S&L crisis, so why should it be sufficient in this, more extreme, crisis? As we said before, the market’s is accepting the FED’s word as gospel here, but for how long?
Rolfe Winkler has updated his estimates of Tangible Common Equity (rumored to be required by the FED to be at least 3%) for big banks . Some banks pass some fail. We suspect the government will change the definition of TCE so that it doesn’t even resemble Rolfe’s and all the banks pass. It should be emphasized that TCE will not tell us ANYTHING about off-balance assets and liabilities or funny accounting for certain assets.
