This made me vomit

[retirwntm]

Ok folks. Companies issue stock and get proceeds for that stock. Any stock owned by the company eyond that that sees price appreciation beyond that is APIC.

For leverage ratio purposes and the calculations that go with them the balance sheet equity number is used, not market cap. Corp finance 101.

[stuckathuntermtn]

I don't know what you just said, but I'm sure there's some tricky accounting procedure by which they can hide the fact that they're leveraged to hell and making a tonof off shitty investments and the government (still ostensibly the people, us) are bailing them out.
This is all still not news.

Sent from my DROID2

[neufox47]

As someone who recently passed the CPA exam, Mtnwriter and Missing Sock are correct.

Stock holders equity is not dependent on the current share price. (Of course if they issue stock you can add to SE)

Market value follows book value (kinda), if this were a tech stock or a company seen as having lots of growth potential, then it would be easier for market value to effect book value. BOA's market value should have a limited impact on its book value.

[4matic]

Would the MBA's explain what I'm missing here. If common equity value goes down so does the banks weighted assets:


To comply with tighter capital requirements banks will need to use more common equity –
and relatively less debt – to finance their activities. Under the recently agreed Basel III rules
banks will effectively need to have common equity capital that is at least 7% of their risk
weighted assets. As a percentage of total (un-weighted) assets that figure will be much lower
– though it cannot fall below 3%. The most systemically important banks may need to use a
bit more equity capital than these figures – maybe as much as 10% of risk weighted assets.
These figures are substantially higher than under Basel II – but they would still allow banks
to have a degree of leverage (assets relative to equity) that is very high relative to non-banks
and also much higher than used to be normal for banks. Even if a bank had equity capital
relative to risk weighted assets of 10% that might allow leverage to be 30, since a ratio of risk
weighted assets to total (un-weighted) assets as low as one-third is not uncommon.

http://www.gsb.stanford.edu/news/pac...sWSJ070111.pdf

[wooley12]

The drift in this thread indicates the problem. The morality doesn't matter how profits are made as long as the stock price rises in the short term.

[4matic]

The drift in this thread indicates the problem. The morality doesn't matter how profits are made as long as the stock price rises in the short term.

Capitalism is immoral by nature. Get over it. It's like being a carnivore.

[wooley12]

Disagree. I think it's a great economic system. It has been allowed to become immoral. Greed is just human nature and needs to be kept in check for the betterment of society as a whole.

[Missing Sock]

Would the MBA's explain what I'm missing here. If common equity value goes down so does the banks weighted assets:


To comply with tighter capital requirements banks will need to use more common equity –
and relatively less debt – to finance their activities. Under the recently agreed Basel III rules
banks will effectively need to have common equity capital that is at least 7% of their risk
weighted assets. As a percentage of total (un-weighted) assets that figure will be much lower
– though it cannot fall below 3%. The most systemically important banks may need to use a
bit more equity capital than these figures – maybe as much as 10% of risk weighted assets.
These figures are substantially higher than under Basel II – but they would still allow banks
to have a degree of leverage (assets relative to equity) that is very high relative to non-banks
and also much higher than used to be normal for banks. Even if a bank had equity capital
relative to risk weighted assets of 10% that might allow leverage to be 30, since a ratio of risk
weighted assets to total (un-weighted) assets as low as one-third is not uncommon.

http://www.gsb.stanford.edu/news/pac...sWSJ070111.pdf

Common equity is a balance sheet line item within shareholders equity along with APIC, retained earnings and any preferreds.

When you calculate ROE are you calculating a return on the market value of equity or the balance sheet value of equity? The balance sheet value of equity. Its the same concept when calculating Tier 1 capital ratios for regulatory purposes. Check out Goldman's 4q11 earnings release. They walk you through how they get to common equity ~$69 billion vs. risk weighted assets of $457 billion. The firm's market cap as of Dec 31, 2011 was only ~$48 billion.

Hope that helps

[ArmadaBC]

Disagree. I think it's a great economic system. It has been allowed to become immoral. Greed is just human nature and needs to be kept in check for the betterment of society as a whole.

Greed is not nature, greed is thinking as a consequence of a race or society that equates existence with the collection and consumption of things.

The real end of the day truth is we, I, you need these cock suckers, inventing money is simple, inventing reasons to invent money is very difficult and the invention of new money is the basis for the entire system.

[retirwntm]

Banks like Wachovia we're forced into merger/acquisition when their equity price dropped as their capital ratio was based on the equity price. This is also why the Fed had to give money and forced some institutions to take money to bolster balance sheets based on volatile equity price.

http://www.investopedia.com/terms/d/...#axzz1qv1JOrTD

Again, completely WRONG. The primary issue was all these banks and I banks were insolvent - i.e. their liabilities far outstripped their assets and as a result, short sellers and anyone with one buzzing blinking sliver of a primordial spark of a neuron knew it. This included regulators, the treasury, etc. who quickly tried to marry them off with someone that could survive the toxicity with the help of govvie guarantees on a portion of bad assets.

The fact that the equity prices dropped were only a result of the realization of insolvency. Similar to an EKG pronouncing a patient dead. These banks were stage 4 with cancer all over them. Anyone that knew the situation knew they were dead, just not yet officially called DOA.

[4matic]

Again, completely WRONG. The primary issue was all these banks and I banks were insolvent - i.e. their liabilities far outstripped their assets and as a result, short sellers and anyone with one buzzing blinking sliver of a primordial spark of a neuron knew it. This included regulators, the treasury, etc. who quickly tried to marry them off with someone that could survive the toxicity with the help of govvie guarantees on a portion of bad assets.

The fact that the equity prices dropped were only a result of the realization of insolvency. Similar to an EKG pronouncing a patient dead. These banks were stage 4 with cancer all over them. Anyone that knew the situation knew they were dead, just not yet officially called DOA.

If common equity is part of their assets, "Common equity capital that is at least 7% of their risk
weighted assets."

Then why wouldn't value of the common equity have an impact on the value of those required assets?

[retirwntm]

4matic,

WRT your basel question: this is a specific requirement for the new basel rules. it is simply that banks % split of equity increase as part of its total. measure it however you want, against RWA's or WRA's in this case (a bank specific metric, weight risk assets or risk weighted assets) but the point of this specific basel regulation and the nature of its change is to force banks to hold more equity as a buffer for any unforeseen emergency. debt and leverage increase the problem, equity reduces it. think of it this way - if banks were required to hold 100% of equity equivalent to their risk, if the bank went 100% tits up, it would still be able to cover its losses exactly 1:1. anything less is the amount someone else is on the hook for (potentially) hence the bailout.

[Missing Sock]

If common equity is part of their assets, "Common equity capital that is at least 7% of their risk
weighted assets."

Then why wouldn't value of the common equity have an impact on the value of those required assets?

1) Common equity is not an asset

2) Regulatory capital ratios are dealing with the book or balance sheet value of common equity not the market value of common equity.

[4matic]

Thanks guys. Tail waggin the dog.

[retirwntm]

common equity is at holding value - i.e. the amount the firm received at its primary offering, not the market value of equity.

AND common equity is the 3rd leg of a stool - Assets - Liabilities = Equity + Retained Earnings so assets are not part of equity.

think about this theoretical scenario:

the market hates you. it sells your stock down to 0. however, you have assets that when liquidated are worth $1B and liabilities when settled of $500M. Upon liquidation, your company was worth $500M when the market valued it at 0. This happens all the time, in not so simple an example and is why the market exists. there are a multitude of reasons why there are disconnects between assets - liabilities (which is known as book value) and market value.

[retirwntm]

sorry typing too fast and there is an important distinction here that may have been causing confusion: TANGIBLE book value is a calc of assets - liabilities.

http://www.investopedia.com/terms/b/...#axzz1qzuyBeN0

[Brock Landers]

The fact that the equity prices dropped were only a result of the realization of insolvency. Similar to an EKG pronouncing a patient dead. These banks were stage 4 with cancer all over them. Anyone that knew the situation knew they were dead, just not yet officially called DOA.

Zombie Banks.

Instead of mortgages like in the US in 2008, Euro banks are facing the same situation with sovereign debt. Instead of TARP...they get LTRO. Same shit, effectively.

[retirwntm]

the zombie (bank) apocalypse! its already happened and they live among us. they are sucking out fees on a daily basis!

[neufox47]

Would the MBA's explain what I'm missing here. If common equity value goes down so does the banks weighted assets:


To comply with tighter capital requirements banks will need to use more common equity –
and relatively less debt – to finance their activities. Under the recently agreed Basel III rules
banks will effectively need to have common equity capital that is at least 7% of their risk
weighted assets. As a percentage of total (un-weighted) assets that figure will be much lower
– though it cannot fall below 3%. The most systemically important banks may need to use a
bit more equity capital than these figures – maybe as much as 10% of risk weighted assets.
These figures are substantially higher than under Basel II – but they would still allow banks
to have a degree of leverage (assets relative to equity) that is very high relative to non-banks
and also much higher than used to be normal for banks. Even if a bank had equity capital
relative to risk weighted assets of 10% that might allow leverage to be 30, since a ratio of risk
weighted assets to total (un-weighted) assets as low as one-third is not uncommon.

http://www.gsb.stanford.edu/news/pac...sWSJ070111.pdf

I'm a bit out on a limb here, as banking is not my specialty, so if mtnwriter or any other Street types could fill in... But I will try to explain this in the fundamental terms that I think are being confused.

Equity does not fluctuate with market price. It is "fixed" by the price that the shares were originally sold at. So yes, they can increase SH equity and common equity by issuing common stock. Most banks aren't in a great position to be issuing stock though. There are also lots of hurdles to overcome to issue common stock. No idea how much of its own stock BOA is holding. They can sell it to get cash as well. However, when you sell or issue common stock you make all your fundamentals worse and therefore the stock price should go down proportionally to the extent you added shares.

If SH equity and / or common equity fluctuated with market price then our basic formula of

Assets = Liability + Stockholders Equity

Would have a HUGE problem.

Every time the stock price changed, SE would go up, therefore Assets would also go up (or liabilities would go down). There would have to be an imaginary asset account to account for these fluctuations. Not to mention that the balance sheet fundamentals of a stock would be rocked by any changes in share price.

That is why Stockholders Equity represents what is actually paid in (Paid In Capital), not what it is worth today.

So if a company issues 1 Million shares of stock for $10 each, it has $10 Million of Stockholders Equity. It doesn't matter if the stocks market price is $10 or $10,000 next year. SE doesn't change, it is always $10 Million. (note if your stocks market price falls below the Par Value of of the stock issued (Stock is not usually issued at Par Value) then it can impact your Balance Sheet)

Edit - Just saw Mtnwriters post above. Maybe this explains it more thoroughly (or I'm an accountant)

[ass-to-mouth]

Capitalism is immoral by nature. Get over it. It's like being a carnivore.

Printing $3 Trillion dollars and pimping it to Wall Street bloodsuckers to inflate the stock market is a special kind of "capitalism".