Zombie Dance Party: Was the Banking Industry Really Profitable in 2008?

Last week, when C announced that the US government and several preferred equity holders were converting to common, few were fooled by this obvious canard to bolster TCE without increasing actual capital. Citi also seems a bit sneaky on their presentation. They show TCE as a % of Risk Weighted Assets as opposed to Tangible Assets. The latter nets out the goodwill as with TCE, but RWA is far smaller and would tend to make the TCE look bigger.

In the case of Citibank NA, for example, at the end of 2008 Risk Weighted Assets ("RWA") was $713 billion vs. $1.231 trillion in total assets and some $900 billion in tangible assets. Or to put it another way, RWA was 57% of total assets at Citibank, so obviously dividing the TCE by the smaller RWA gives you a better capital ratio. You'd be surprised how few people actually noticed this last week.

It is very telling that the regulatory "definition" for the stress testing of TCE will also use RWA in denominator, the latest evidence that nobody at the Fed's Board of Governors understands safety and soundness benchmarking. Just for the record, we'll provide a complete set of our stress test results to the Treasury if they so request. But they have to pay for it like anybody else.