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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 21, 2008 3:56 PM ET
Investors may be punishing Citigroup, but according to one analyst, J.P. Morgan Chase may need even more capital than Citi to shore up its balance sheet. Indeed, Paul Miller at Friedman Billings Ramsey calculates that J.P. Morgan may require at least $188 billion in additional equity capital, compared with $160 billion for Citi. Mr. Miller reckons that J.P. Morgan will need more capital than any of the the other largest banks—Bank of America/Merrill, Citi, Wells Fargo/Wachovia, Goldman Sachs and Morgan Stanley—or financial services giants AIG and GE Financial. Though those companies have about $12 trillion in assets in total, their tangible common equity is just north of $400 billion, or about 3.4% of assets. And since tangible common equity is “the first loss position” when it comes to bad loans, that number is “simply too low,” according to Mr. Miller. Mr. Miller assumes that banks need capital equal to 5% to 6% of risk-weighted assets to cover possible losses. If the underlying capital is financed in the short-term funding market, then banks should set aside at least 10% to 14% more to account for the possibility that short-term money could suddenly become less available. Though J.P. Morgan has more tangible common equity, at $90 billion, compared with Citi’s $35.5 billion, J.P. Morgan also has more risk-weighted assets, at about $1.3 trillion, compared with Citi’s $1.2 trillion. As such, the bank could need at least $127 billion to cover those assets, compared with almost $97 billion for Citi. Overall, the eight financial services companies examined in the FBR research may need between $1 and $1.2 trillion in funds from the government to work their way out of the current imbalance, which developed over a period of years as financial institutions placed too much reliance on short-term funding. “The U.S. financial system became too lax with respect to capital levels and the use of short-term funding to finance assets,” Mr. Miller wrote in a note dated Nov. 19. “Capital levels have plummeted, while short-term funding exploded over the last few years.” Add to that the mispricing of credit and interest rate risk, and you have a “dangerous cocktail” in a credit crisis such as this, he added. Financing from the Treasury’s Troubled Asset Purchase Program is helpful, but because it doesn’t go directly to tangible common equity, it’s not going to the right place. Only in the case of AIG did the government get it almost right, Mr. Miller noted. “If the government would convert TARP capital issuances into pure, tangible common capital (akin to the $23 billion C class investment in AIG), it would go a long way toward encouraging subsequent private investment,” he wrote. Returning to older—and more stable—funding models will also help. “Through higher interest rates on loan products, significantly larger loan loss reserves, and more common equity, the banking industry will eventually return to a sustainable business model,” according to Mr. Miller.
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