Saturday, May 9, 2009

The Mystery Starts To Unfold....

The Wall Street Journal reported earlier tonight that the Stress Test capital benchmark was not the expected ratio:

"On Friday, some analysts questioned the yardstick, known as Tier 1 common capital, that regulators chose to assess capital levels. Many experts had assumed the Fed would use a better-known metric called tangible common equity."

When is enough, enough?


buchlajoe said...

Is it possible to give an explanation of the main differences between Tier 1 capitol and TCE ? thanks

MK said...

Yes and no.

Tier 1 is clearly defined by regulators as follows:

common equity + noncumulative perpetual preferred stock + minority interests in consolidated subsidiaries - goodwill and other ineligible intangible assets

Basically, it is the sum of common equity and old-fashioned preferred equity less intangibles.

Tangible common equity is more loosely defined:

common equity - preferred - intangibles

Since this is not a metric used by regulators, the definition of intangibles allows for interpretation.

The key intangible is mortgage servicing rights. These are tough to value and trade, but are key to the survival of Wells and BoA.

So even if the Fed used TCE, they could have fudged it.

MK said...

Another important intangible is goodwill, but that would be terribly difficult to count, in any circumstance, as tangible.