IRA has released its Banking Industry Stress Ratings for all US banks as of Q4 2008 for users of the professional and consumer versions of The IRA Bank Monitor. In Q4 2008, average industry stress rose 15% to 1.77 vs. Q3 2008. The Stress Index is now 77% above the benchmark for all US depository institutions (1=1995).

You can get more information about the consumer and professional versions of The IRA Bank Monitor by clicking here.

To read our press release and summary of the ratings for Citigroup (NYSE:C), Bank of America (BAC), Wells Fargo (NYSE:WFC) and JPMorganChase (NYSE:JPM), click here.

First we want to say a big thank you to the folks at the FDIC for their quick response when we took them to task several weeks ago for making changes to the external resources available to the public, particularly for machine-to-machine queries.

We are now happily accessing the Central Data Repository ("CDR") again to access CALL/TFR facsimiles. And our CEO Dennis Santiago and our colleagues are setting up automation routines to pull data from the CALL/TFR reports and run preliminary bank stress ratings on institutions during the first half of the quarter. All these changes will improve the timeliness of the IRA Bank Monitor by several weeks. Starting with Q1 2009, when a new CALL/TFR report hits the CDR, we will grab the data in real time, calculate the preliminary rating, and send an alert to users of the IRA Bank Monitor with that institution in their alert portfolio.

How cool is that?

FDIC's implementation of these automated data delivery protocols represents a big win for the public users of bank data and illustrates the efficacy of automated data exchange. The proliferation of XML dialects into the financial data world, particularly in terms of data collection methods, makes great sense and the FDIC and the vendors supporting the agency deserve big kudos for making this happen.

Fortunately, rather than just support a "pure" implementation of a particular flavor of XML, meaning straight through XML from data collection to consumption, the FDIC wisely follows the example of the Federal Reserve Board and other agencies and supports both XML and other established data transport paths, including our old favorite the compact data file or CSV format.

Dennis will be holding forth in our Picking Nits blog on how applying a combination of technologies actually best supports the "better, cheaper faster" path to meeting professional financial analysis needs. Or to put it another way, if we got our data from the FDIC in XML instead of CSV, you would not see ratings until next week and the time and processing overhead required in calculating our new "of-the-fly" ratings would increase many times. Our friends at the SEC working on EDGAR modernization take note of how FDIC has threaded the technology needle by giving the consumers freedom of choice when it comes to data use case business models.

Q4 2008 Banking Industry Results

The results for the banking industry are about what we expected. The FDIC reported: "Expenses associated with rising loan losses and declining asset values overwhelmed revenues in the fourth quarter of 2008, producing a net loss of $26.2 billion at insured commercial banks and savings institutions."

But the FDIC seems to playing the same games with loss disclosure and stress scenarios as is the Geithner Treasury and Fed with respect to the large bank stress tests. For example, the FDIC estimate of cumulative bank losses seems to be about as tough as the 'adverse scenario' in the Treasury stress test for large banks, according to several readers of The IRA.

On Friday, FDIC said cumulative losses to the Deposit Insurance Fund through the cycle would be $80 billion. The loss estimates from the 41 failures are around 35 cents on the dollar. Using this 35% Loss Given Default implies total failed bank assets of $228 billion, which only represents 1.65% of industry assets.

As one IRA reader opined: "I assume you would take over on that bet." Yup.

While the industry reported a quarterly loss of $26.2 billion, full-year earnings were still positive by $16.1 billion. However, it appears that the quarterly and year figures do not reflect results from Wachovia Bank because of the timing of the takeover by WFC.  Under purchase accounting rules used by our favorite bank regulatory agency, the earnings clock gets reset, or so we are led to believe, thus Q4 only includes 1 day of operations ($200k loss) for WB.

We hear in the resolutions channel that WB had submitted a Q4 TFR filing for its thrift subsidiary (f/k/a World Savings) with a loss of $2 billion. Also, the lead bank of WB apparently had a writedown of ~$23b in goodwill. Hence, is could be argued that around $25 billion of losses were not reflected in Q4 results.

In addition, during Q3, we hear that operating losses of Washington Mutual were not fully reflected due to the same accounting treatment with the acquisition by JPM. WM closed on September 25 and was on pace to have a very large loss in Q3. Like WB, the losses of WM are not included in the full-year numbers. The lead thrift had a loss of $3.2b in Q2 2009.

Together, if we're right about the above, WB and WM would have significantly changed the full year results for the industry. Instead of income of $16.1b, the US banking industry would have lost a least $8 billion. The last time the industry lost money for the full year was 1987.

What is Tangible Common Equity and Does More Make Citigroup Safer?

With the imbroglio last week regarding the conversion of preferred equity in C into common to provide some superficial relief regarding the banks levels of tangible common equity, we asked our friend Bert Ely of Ely & Co. to describe the difference between TCE and regulatory capital measures.

"TCE -- tangible common equity -- is an unofficial term which has gained great prominence in recent months. As I understand it, TCE is simply the GAAP book value of common equity minus goodwill and possibly minus other intangible assets. Therefore, the TCE ratio would be TCE divided by total assets minus whatever intangible assets were subtracted from common equity in calculating TCE," says Ely.

"Tier 1 capital is a regulatory capital definition that varies from country to country and includes a number of pluses and minuses to equity capital. This FDIC worksheet is a good example as any of the calculation of Tier 1 capital:

http://www.fdic.gov/regulations/safety/manual/section17-1_capcalc.html

"TCE essentially is a leverage ratio, albeit a conservative one. It will be interesting to see the extent to which this market-driven capital measure overwhelms various regulatory measures of bank capital," Ely concludes.

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.

In 2007, C reported over $40 billion in intangibles, which dropped to $27 billion at the end of 2008. The firm's TCE to tangible assets is an abysmally low 1.4%. If you use the low side of their estimate of preferred conversion (i.e., $12.5 (committed) and $12.5 UST), this gets them to a TCE of around 2.55%, still too low, IOHO, and not enough to withstand stress.

If high side pricing for the C prefeered converts strikes your fancy, then TCE is 3.8% - maybe enough, but we feel they are likely to go to undercapitalized in the severe stress case that seems likely for the US economy in 2009. And don't forget we still have another $27 billion in goodwill, deferred tax assets and other intangibles to deal with going forward.

Bottom line: The US government is collecting a fine group of Zombies. Fannie Mae, Freddie Mac, American International Group (NYSE:AIG) and Citigroup. These zombies don't eat people, they eat money. And as 2009 proceeds, the amount of money that these Zombies eat is going to grow until the Obama Administration is going to be forced to do the right thing, at least with AIG and C, and put these two zombies into a restructuring and place their regulated entities under conservatorship. More on precisely how to do that in our next issue.

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