Much of the talk in the wake of the release of the Federal Reserve’s stress test results yesterday has centered on the banks that need to raise capital. Bank of America, Wells Fargo & Co., GMAC LLC, et al face the task of shoring up their Tier 1 capital ratios — or else.
But this loses sight of the whole reason why the Fed tested the banks to begin with, and that is to find out which banks are fiscally prepared for a worsening economic hurricane and which are not. So, after all the hubbub and news leaking and rumors, which of the 19 banks receives the crown as the Safest Bank in the United States?
Goldman Sachs Group Inc.
I calculated which bank has the greatest cushion of Tier 1 capital against the total estimated losses according to the Fed’s stress test, and Goldman came out on top by needing just 31.84% of its Tier 1 capital to cover its stress-test-level losses. Goldman was followed closely by MetLife bank at 31.89%. Both banks were not required by the Treasury Department to raise additional capital.
On the other end of the spectrum was American Express, which just wiggled its way out of being required to raise additional capital. Amex needs 110.89% of Tier 1 (in other words, more than it currently has on hand) to cover its losses. It was because of its other “resources” to cover losses that Amex did not need to raise new capital.
Here’s the list of the ranking of the coverage ratio of the nine banks:
BANK: PERCENTAGE OF TIER 1 NEEDED TO COVER ESTIMATED LOSSES
1. Goldman Sachs: 31.84%
2. MetLife: 31.89%
3. Bank of New York Mellon: 35.06%
4. State Street: 58.16%
5. US Bancorp: 64.34%
6. BB&T: 64.93%
7. JP Morgan Chase: 71.51%
8. Capital One: 79.76%
9. American Express: 110.89%
No wonder Stephen Friedman, chairman of the board of the Federal Reserve Bank of New York, was buying up GS shares.
Goldman Sachs is bank in name only. If you look at them in detail they are still an investment house. If you look at them as a bank, bread and butter lending constitutes only 3.37% of operations. 96.6% of economic capital is deployed in risk bearing investments. They became a BHC because only BHC’s were eligible to participate in govenment support. The IB’s that did not make it like Lehman Brothers and Bear Stearns went extinct. The counterpoint to always consider when looking at Goldman Sachs is is the plight of Bank of America. Look what picking up another of the extinct now IB’s, Merrill Lynch, did to them.
I’m not so sure how GS would do if they broadened operations to bring in more main street banking to their business mix. It’s so different from the organization’s core culture. Picture Goldman Sachs in your mind. Now picture a Goldman Sachs teller in your mind. Personally, if ever there was a case to be made for a BHC that might ultimately do better to exit banking regulatory oversight and go back to filing PHOCUS reports instead of CALL reports, they’re the ones.
The true test question is can they survive issuing debt in the markets solely on their own sans any government guarantees. That’s the hurdle Washington just put in front of any bank wishing to turn in TARP money.