Comments on: Tangible Common Equity for Beginners

By: chand

chand — Thu, 19 Mar 2009 19:33:23 +0000

Fabulous article. So is Citi a good long term buy at $3?

By: What Does Stress Testing of Banking Mean? « Random Observations

What Does Stress Testing of Banking Mean? « Random Observations — Fri, 13 Mar 2009 17:50:32 +0000

[...] According to economist Dr. James Kwak: [...]

By: guitry

guitry — Tue, 10 Mar 2009 20:30:40 +0000

The concept of TCE is counterintuitive. If all you have to do to make a Bank solvent is issue more shares, then it is a receipt for devaluation. I ask myself what good does the added stock do. The Bank can not spend it. Debt vs assets (excluding stock) is a much better way. I just don’t see TCE as an asset. In fact when a Co. buys back shares and the shares for one reason or another do not go up appreciably, then the TCE goes down? Ridiculous.

By: Terrance Gibson (final opinion of complete article)

Terrance Gibson (final opinion of complete article) — Tue, 10 Mar 2009 19:24:12 +0000

Hi! The article was so revealing that I had to compliment you before even completing my read of it! (See my previous comment.) Your explanation and ($100) example of capital adequacy and tangible common equity have proven most enlightening. I got crossed up with the $100 dollar example, and initially thought that the $100 in assets consisted of the ‘total debt plus the capital’, which in the example was also equal to $100. Clearly this is not the case as the $100 in assets consist solely of ‘commmon shares valued at $100′. It took a few read throughs to get this. As the article (early on) presents the challenge distinguishing between debt and equity (by noting that “preferred shares are like debts”, but are also “like equity”) I thought the $100 in assets (in the example) actually consisted of the ($90 and $99) “debts” plus the ($1 and $10 in) capital referred to in the exammple. (Whether more clarity can be provided here may be debatable. Perhaps I was reading to fast.) I do want to let you know that the article has been enjoyably intresting and illuminating on the subject discussed. Thank you!

By: Terrance Gibson (final opinion of complete article)

Terrance Gibson (final opinion of complete article) — Tue, 10 Mar 2009 19:21:53 +0000

Hi! The article was so revealing that I had to compliment you before even completing my read of it!(See my previous comment.) Your explanation and ($100) example of capital adequacy and tangible common equity have proven most enlightening. I got crossed up with the $100 dollar example, and initially thought that the $100 in assets consisted of the ‘total debt plus the capital’, which in the example was also equal to $100. Clearly this is not the case as the $100 in assets consist solely of ‘commmon shares valued at $100′. It took a few read throughs to get this. As the article (early on) presents the challenge distinguishing between debt and equity (by noting that “preferred shares are like debts”, but are also “like equity”) I thought the $100 in assets (in the example) actually consisted comprised of the ($90 and $99) “debts” plus the ($1 and $10 in) capital referred to in the exammple. (Whether more clarity can be provided here may be debatable. Perhaps I was reading to fast.) I do want to let you know that the article has been enjoyably intresting and illuminating on the subject discussed. Thank you!

By: Terrance Gibson

Terrance Gibson — Tue, 10 Mar 2009 18:35:08 +0000

Hi! I have not even made through the entire article however, your explanation and ($100) example of capital adequacy and tangible common equity have proven most enlightening. I got crossed up with the $100 dollar example and initially thought that the $100 in assets consisted of the total debt plus the capital, which in the example was also equal to $100. Clearly this is not the case as the $100 in assets consist of “commmon shares” valued at $100; and the outstanding debt liabilities are equal to$ $90 and $99 leaving a balance of capital of $10 and $1. It took a couple of read throughs to get this. As the article discusses differing ways for accounting for assets (i.e. preferred shares may be viewed as assets or liabilities), I thought the $100 in assets was actually comprised of the ($90 and $99) “debts” plus the ($1 and $10 in) capital referred to in the exammple. (I don’t know if more clarity can be provided here.) In any event, the article is most enlightening thus far. Thank you!

By: Hedge Fund Invest

Hedge Fund Invest — Sat, 07 Mar 2009 14:09:08 +0000

Excellent overview. I enjoyed reading it very much.
One issue is the banks “trust preferred” securities.
While the street facing securities aren’t actually debt, they are backed by junior subordinated (the lowest of the low in the DEBT portion of the capital structure) bonds. And they have legal rights against these bonds (i.e. rights of subrogation, etc.)

These trust preferreds are trading at a slight premium to the plain vanilla preferreds. However, given the legal rights they have, do you, or anyone, have any thoughts on how they will be / should be handled?

I believe these instruments will get back par $25 in the end, but I welcome the debate.

By: A Quick Note on Bank Liabilities « The Baseline Scenario

A Quick Note on Bank Liabilities « The Baseline Scenario — Fri, 06 Mar 2009 19:05:40 +0000

[...] government may try to force creditors to exchange their bonds for common stock in future bailouts. Preferred shares are not, technically speaking, debt. But they are a lot like debt, and once you finish converting [...]

By: Bernanke’s Boiled Frog Plan To Recapitalize Banks | Photomaniacal

Bernanke’s Boiled Frog Plan To Recapitalize Banks | Photomaniacal — Wed, 04 Mar 2009 06:59:38 +0000

[...] minds are reading Tangible Common Equity for Beginners. The initial government investments in Citigroup, back in October and November, were in the form of [...]

By: Brian

Brian — Mon, 02 Mar 2009 19:51:45 +0000

Dr. Kwak,

I really appreciate everything you do through this site. You’re always concise and current, I thought I would let you know I read your blog daily. Thanks again

By: Monday, March 2, 2009 « Rising in Phoenix

Monday, March 2, 2009 « Rising in Phoenix — Mon, 02 Mar 2009 12:18:18 +0000

[...] I’ve been writing about preferred and common stock so much this week, I thought I would just try to explain the arithmetic of the Citigroup deal [...]

By: Valhalla

Valhalla — Sun, 01 Mar 2009 06:10:42 +0000

Thanks. It explains the Fed/Citi dance to convert pfd to common.

But this should do absolutely nothing to sooth a bank CEO as he watches daily bear raids on his share price.

By: On the Contrary » Blog Archive » The Bank Problem

On the Contrary » Blog Archive » The Bank Problem — Sat, 28 Feb 2009 16:11:40 +0000

[...] Continuing to Capitalize the Banks through preferred stock – This is basically what TARP did but has been adjusted recently. It buys stock that is “preferred” in that they get a guaranteed return on the sock of 5%-8%, but have no voting interest. The banks can then choose to convert this preferred stock to common stock getting out of the burden of the dividends, but then giving the government voting interest in running the bank. Considering the price of most banks stocks and the cash needed, this would actually nationalize the banks without calling it nationalization. Downside – While it infuses cash, it probably is not enough and requires Congress to authorize more, and it skirts the ownership issue leaving bad management in place unless the bank opts to turn itself over to the Feds. If you really want to have your eyes roll back in you head, clink on this link to understand the details of this type of investment (The Baseline Scenario). [...]

By: Citigroup Arithmetic Explained « The Baseline Scenario

Citigroup Arithmetic Explained « The Baseline Scenario — Sat, 28 Feb 2009 03:39:47 +0000

[...] 27 comments Since I’ve been writing about preferred and common stock so much this week, I thought I would just try to explain the arithmetic of the Citigroup deal [...]

By: guitry

guitry — Sat, 28 Feb 2009 03:02:00 +0000

I still want to know if privately held preferred shares are going to be mandatorily converted. If so at what price? Also what about the special Cap trust preferred? Will they be converted mandatorily. Will they still receive a dividen?