By Rolfe Winkler (Option ARMageddon):
The table below is an update from this post published a couple months ago (the prior post also explains this leverage calculation in detail…and why it matters). Click on the image to enlarge.
As you can see, Morgan Stanley and Goldman have cut their leverage significantly. Citi is in worse shape. BofA and Chase are treading water.
GE is the scary one. I mean, is Timmy Geithner going to stress test them too? I’m pulling balance sheet data from their quarterly earnings release, which doesn’t offer any detail on shareholders’ equity. I’m assuming that the published equity figure of $104.7 billion includes the $3 billion preferred investment that Warren Buffett announced on October 1st. I’m deducting that amount from tangible common equity in order to get GE’s leverage ratio. If I have that incorrect, hopefully a better-informed reader will let me know.
December 30th’s was the first balance sheet the banks have published since they received TARP capital. Common shareholders are still in a first-loss position relative to the government, however, because TARP investments were in the form of preferred shares. So I have backed these out in order to arrive at the tangible leverage ratios above.
One BIG caveat with this calculation is that these companies carry “other assets” on the balance sheet, some of which might be intangible in nature. Also, each has significant risk exposure via off-balance sheet entities. The point is, even though these leverage calculations seem high, they actually understate the risks facing common shareholders…
If you’re a glutton for leverage stats, check out these three posts in order: