Wednesday, February 18, 2009

Bank Leverage Ratios... GE Boomin'

Option ARMageddon via Infectious Greed reports:

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.

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…


  1. Jake - question about GS. I thought they always had the highest leverage in the industry? Why has that changed? I can think of three potential reasons:

    1. Their asset base has not fallen as much as those of the other banks (i.e., the their denominator has not shifted as much to the
    2. They have aggressively shed significant amounts of leverage (I have not heard anything about this)
    3. They hold more 'off balance sheet' risk
    Or some combination of the above.

    Thoughts? It seems to me like they have invested a ton in these 'special situations' type of assets which are highly illiquid even during the boom and are probably complete Zeros. I am wondering when this will hit their bottom line...

  2. Isn't the Fed an off balance sheet vehicle for GS?

  3. great point! i am not sure if that means they have more or less risk :)

  4. they are also significantly smaller and more nimble than a citi. thus any capital they raised (via the government or good ole mr. buffet) had a much greater impact.

    also, as a trading company they had to mark to market more of their assets, thus thinking they probably shed them earlier in the cycle than the others...

  5. The GE figures are based on the combined entity. If you split out capital, the tangible capital ratio is 26.

    page 73