Kraven Posted August 8, 2011 Share Posted August 8, 2011 Political operative??? Are people saying that even if a bank's common went to $0 that it would have no effect on their regulatory capital ratios? That would presumably mean they were bankrupt, no? You are saying the common has no value at all? Either way, all else being equal the price of the common has no bearing on their capital ratios. If BAC issued and sold 100 shares of stock to someone for $6, they would have $600 in capital added to their ratios. It doesn't matter if tomorrow the stock is $5 or $50. Link to comment Share on other sites More sharing options...
rogermunibond Posted August 8, 2011 Share Posted August 8, 2011 Denninger is an idiot if he wrote that. And I feel like I wasted 10 minutes of my life reading this thread. Link to comment Share on other sites More sharing options...
Munger Posted August 8, 2011 Author Share Posted August 8, 2011 I do not believe for a minute the books have been scrubbed clean. I can also assure you that bank stocks are not collapsing because of a concern that interest rates will rise to punishing levels any time soon. The concern right or wrong is BANK CAPITAL LEVELS relative to ASSET QUALITY. No one outside of bank management themselves has any certainty in this regard. Those willing to have blind faith in management marks reminds me of LEH and Bear Stearns. I'm not saying current TBTF banks are LEH or Bear Stearns (I don't know) but the faith of the bulls reminds me of the faith of the bulls in those companies when they were imploding. Subsquently we learned that comments from those management teams we complete lies. We also learned that most companies that claimed they were well capitalized at the time would have failed if the Fed had not bailed them out. Link to comment Share on other sites More sharing options...
dcollon Posted August 8, 2011 Share Posted August 8, 2011 rogermunibond, Your comment make me think of this http://www.youtube.com/watch?v=5hfYJsQAhl0. Hopefully we can all have a little laugh today. Link to comment Share on other sites More sharing options...
Munger Posted August 8, 2011 Author Share Posted August 8, 2011 "If BAC issued and sold 100 shares of stock to someone for $6, they would have $600 in capital added to their ratios. It doesn't matter if tomorrow the stock is $5 or $50." Sure it does -- if there is a claim on that capital, there is NO CASH available related to this "accounting capital" to pay the claim. The only way to access cash related to this capital is to sell stock. I seriously hope you aren't relying on book equity as the basis for a sound investment in bank stocks -- you should think beyond simple accounting measures...no? Link to comment Share on other sites More sharing options...
Kraven Posted August 8, 2011 Share Posted August 8, 2011 "If BAC issued and sold 100 shares of stock to someone for $6, they would have $600 in capital added to their ratios. It doesn't matter if tomorrow the stock is $5 or $50." Sure it does -- if their is a claim on that capital, there is NO CASH available related to this "accounting capital" to pay the claim. The only way to access cash related to this capital is to sell stock. In my example, they did sell the stock. Read it again. Link to comment Share on other sites More sharing options...
Santayana Posted August 8, 2011 Share Posted August 8, 2011 Political operative??? Are people saying that even if a bank's common went to $0 that it would have no effect on their regulatory capital ratios? That would presumably mean they were bankrupt, no? You are saying the common has no value at all? Either way, all else being equal the price of the common has no bearing on their capital ratios. If BAC issued and sold 100 shares of stock to someone for $6, they would have $600 in capital added to their ratios. It doesn't matter if tomorrow the stock is $5 or $50. Why would that mean they were bankrupt? A $0 price basically just means there are no bids. Just because nobody wants to buy a business doesn't mean that it is bankrupt. Link to comment Share on other sites More sharing options...
Munger Posted August 8, 2011 Author Share Posted August 8, 2011 Kraven -- no let's deal in the real world....BAC didn't sell stock yesterday or any time recently. There is no available cash correspoding to the book equity counted as capital. So as we sit today -- if BAC needs to access this capital there is no way but to sell stock, which is impeded every day the stock price collapes. As I think through this, I believe Denninger is spot on, especially as stock prices collapse. Counting book equity as capital to lend against is insane. Investing on this basis is equally crazy. I seriously hope you aren't relying on book equity as the basis for a sound investment in bank stocks -- you should think beyond simple accounting measures...no? Step 1 in investing to ignore what the accountants tell you. Link to comment Share on other sites More sharing options...
bmichaud Posted August 8, 2011 Share Posted August 8, 2011 What is your agenda? You are so far off the reservation regarding this topic that there must be something behind these wildly false statements... Kraven -- no let's deal in the real world....BAC didn't sell stock yesterday or any time recently. There is no available cash correspoding to the book equity counted as capital. Are you saying that a "potential" issuance of stock is being counted as capital? I don't at all understand the above-bolded statement. So as we sit today -- if BAC need to accuess this capital there is no way but to sell stock, which is impeded every day the stock price collapes. As I think through this, I believe Denninger is spot on, especially as stock prices collapse. BAC's current capital position is based on its current assets and liabilities (the value of which can be debated) and has NOTHING TO DO with the potential future need to issue stock. Again I do not at all understand what you are trying to accomplish here... Link to comment Share on other sites More sharing options...
Myth465 Posted August 8, 2011 Share Posted August 8, 2011 This pains me to type but I slightly see where Munger is coming from. I believe Munger's point is that equity is neither an asset or liability, its basically an accounting plug when you issue stock. He is basically wondering why its included in Tier One.... Citigroup common stockholders' equity $176,052 In accounting A - L = E I know accounting but nothing about banks - which is why I dont and havent invested in them. I have looked at AIG and BAC off and on, but they always stay in the too hard pile. Link to comment Share on other sites More sharing options...
Munger Posted August 8, 2011 Author Share Posted August 8, 2011 I'm not trying to accomplish anything. I don't believe you understand paid-in capital. Link to comment Share on other sites More sharing options...
Rabbitisrich Posted August 8, 2011 Share Posted August 8, 2011 The concern right or wrong is BANK CAPITAL LEVELS relative to ASSET QUALITY. No one outside of bank management themselves has any certainty in this regard. Those willing to have blind faith in management marks reminds me of LEH and Bear Stearns. I'm not saying current TBTF banks are LEH or Bear Stearns (I don't know) but the faith of the bulls reminds me of the faith of the bulls in those companies when they were imploding. Subsquently we learned that comments from those management teams we complete lies. We also learned that most companies that claimed they were well capitalized at the time would have failed if the Fed had not bailed them out. Asset values in 2007 were based upon long period of increasing home prices and declining personal savings rates. Three and half years later we have seen loan performance in a deep recession and most measures have improved or leveled. Link to comment Share on other sites More sharing options...
cayale Posted August 8, 2011 Share Posted August 8, 2011 As I think through this, I believe Denninger is spot on, especially as stock prices collapse. Counting book equity as capital to lend against is insane. Investing on this basis is equally crazy. I seriously hope you aren't relying on book equity as the basis for a sound investment in bank stocks -- you should think beyond simple accounting measures...no? Step 1 in investing to ignore what the accountants tell you. Oy vey. Sorry i took the bait. Returning to lurker status. Link to comment Share on other sites More sharing options...
Myth465 Posted August 8, 2011 Share Posted August 8, 2011 This pains me to type but I slightly see where Munger is coming from. I believe Munger's point is that equity is neither an asset or liability, its basically an accounting plug when you issue stock. He is basically wondering why its included in Tier One.... Citigroup common stockholders' equity $176,052 In accounting A - L = E I know accounting but nothing about banks - which is why I dont and havent invested in them. I have looked at AIG and BAC off and on, but they always stay in the too hard pile. Perhaps they start with Equity because its Assets - Liabilities = Equity Thats basically shorthand for Assets - Liabilities. It seems that after that, all the junk such as intangibles are removed to come up with a hard real number. Thats what it looks like is happening below with Citi Tier 1 Common Citigroup common stockholders' equity $176,052 Less: Net unrealized losses on securities available-for-sale, net of tax (603) Less: Accumulated net losses on cash flow hedges, net of tax (2,567 ) Less: Pension liability adjustment, net of tax (4,065) Less: Cumulative effect included in fair value of financial liabilities attributable to the change in own credit worthiness, net of tax 243 Less: Disallowed deferred tax assets 35,392 Less: Intangible assets: Goodwill 26,621 Other disallowed intangible assets 5,023 Other (649 ) Total Tier 1 Common $ 115,359 Link to comment Share on other sites More sharing options...
Munger Posted August 8, 2011 Author Share Posted August 8, 2011 Cayale is pretty good at throwing insults but not much esle. How does someone afraid to invest in bank stock becuase he fears rising interest rates feel so bold to level personal attacks. Paid in capital is nothing but air -- in times of distress and collapsing stock prices, this is extremely relevant or should be to any rational investor. Link to comment Share on other sites More sharing options...
Kraven Posted August 8, 2011 Share Posted August 8, 2011 This conversation is going nowhere. Shareholders equity may be in some respects an accounting plug, and it certainly doesn't mean that there is that amount of money sitting in a bank account; however, it does represent the amount that is available once liabilities are paid in full. And that is the amount that would be available to pay creditors, etc. Tier 1 simply means it's capital that can't be taken away if you will - it doesn't need to be paid back. That's why certain amounts of say trust preferred securities can be counted as Tier 1. Because it needs to be paid back in 30 years, but regulators assume that 30 years essentially is such a long time it's "permanent". I am not sure why these concepts are appearing so foreign. How is it any different than looking at an industrial and saying they are selling below book? Or people saying FFH or BRK are right around book at any time? Do any of these companies have a bank account with that amount of money sitting in it? Of course not. If you don't trust the bank's assets, that's fine, don't invest, but shareholders equity is shareholders equity. Munger, if this doesn't answer your question, you are probably too much a genius for me and I will never get it. Link to comment Share on other sites More sharing options...
bmichaud Posted August 8, 2011 Share Posted August 8, 2011 You my friend do not understand paid in capital. PIC is merely an accounting term - once that capital is "paid in" via a stock offering, the company then uses the capital to do whatever it likes, whether it's to lend, buy equipment, or simply park it in cash. So if BAC started from scratch and issued $100B worth of stock, its books would be as such: $100B Assets $0 Liabilities $1B common stock $99B paid in capital $0 retained earnings $0 other comprehensive income It doesn't matter what those assets are comprised of - if they were 100% cash or 50-50 cash and loans, the equity would be siphoned off between those four equity categories (which I am assuming you are familiar with). Cayale is pretty good at throwing insults but not much esle. How does someone afraid to invest in bank stock becuase he fears rising interest rates feel so bold to level personal attacks. Paid in capital is nothing but air -- in times of distress and collapsing stock prices, this is extremely relevant or should be to any rational investor. Link to comment Share on other sites More sharing options...
Munger Posted August 8, 2011 Author Share Posted August 8, 2011 Kraven -- I have no question. Nor do I criticize your personal conclusions re bank stocks -- in fact, I hope those decisions work out for you and everyone else on this board. I am simply highlighting a risk related to the accounting for capital that gets greatly heightened during a period of stress and collapsing stock prices. Link to comment Share on other sites More sharing options...
Myth465 Posted August 8, 2011 Share Posted August 8, 2011 Kraven -- I have no question. Nor do I criticize your personal conclusions re bank stocks -- in fact, I hope those decisions work out for you and everyone else on this board. I am simply highlighting a risk related to the accounting for capital that gets greatly heightened during a period of stress and collapsing stock prices. But what is the risk you are highlighting isnt an actual risk. Bmichaud has outlined perfectly what happens in accounting terms. Can you not admit you might have been off? Link to comment Share on other sites More sharing options...
Munger Posted August 8, 2011 Author Share Posted August 8, 2011 No -- bmichaud is WRONG. "It doesn't matter what those assets are comprised of" I assuming you are familiar with unsecured lending? The asset behind unsecured lending is complete air. During periods of stress, this risk and the risk associated with the accounting gets greatly heightened. Unsecured lending and the accounting of the corresponding capital creates an enormous air pocket that disappears when you actually need to access that capital! Link to comment Share on other sites More sharing options...
Myth465 Posted August 8, 2011 Share Posted August 8, 2011 It seems like your argument is a moving target and just shifts with the conversation.... bmichaud was right regarding Tier 1 and the original argument inmo (which isnt worth much). Now it seems like its on to a new tangent. Link to comment Share on other sites More sharing options...
bmichaud Posted August 8, 2011 Share Posted August 8, 2011 I've heard from folks off of this board how difficult it is to argue with Munger due to his irrationality....I now fully understand. You can't fight irrationality with rationality. No -- bmichaud is WRONG. "It doesn't matter what those assets are comprised of" I assuming you are familiar with unsecured lending? The asset behind unsecured lending is complete air. During periods of stress, this risk and the risk associated with the accounting gets greatly heightened. Unsecured lending and the accounting of the corresponding capital creates an enormous air pocket that disappears when you actually need to access that capital! Link to comment Share on other sites More sharing options...
ericd1 Posted August 8, 2011 Share Posted August 8, 2011 Bank capital (for example Tier I) is NOT the same as shareholders' equity - Period! http://en.wikipedia.org/wiki/Tier_1_capital If you want to understand the concept read the Basel Accord for the details. Link to comment Share on other sites More sharing options...
cwericb Posted August 8, 2011 Share Posted August 8, 2011 “The asset behind unsecured lending is complete air.” Sorry but I have trouble letting that pass without comment. Unsecured credit may be less of an asset on a percentage of the credit written as compared to secured credit. However the lending criteria imposes higher requirements on the unsecured borrower. In other words the borrower must have a greater ability to pay than with a secured loan. For example, I would rather have a doctor owe me $10,000 unsecured than the kid out of school who borrows $10,000 to buy a second hand car. Dismissing unsecured loans is to overlook the higher borrowing standards as well as the fact that there are legal means to recover defaults. Link to comment Share on other sites More sharing options...
vinod1 Posted August 8, 2011 Share Posted August 8, 2011 We are in the realm of Generally Accepted Munger Principles (GAMP) so I would gently request GAAP be left unmolested. :) Thanks Vinod Link to comment Share on other sites More sharing options...
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