Treasury's actions hurt tangible equity

Posted Oct 27th 2008 4:38PM by Todd Harrison
Filed under: Forecasts, Market Matters, Federal Reserve, Recession, Financial Crisis

This post is by a Minyanville contributor:

While regional banks are soaring on news that the U.S. Treasury is buying preferred stock in a number of banks, I would remind readers that while the Treasury's investment boosts "Tier 1 Capital", it does nothing for tangible common equity.

Why does this matter?

Because when losses come or common dividends are paid, they come out of common equity.

On Friday, when PNC Financial (NYSE: PNC) purchased National City (NYSE: NCC), PNC announced that thanks to the U.S. Treasury's purchase of preferred stock, the bank's Tier 1 ratio was increasing from 8.2% to 10%. At the same time, however, the bank disclosed that its tangible common ratio declined from 3.6% to 3.5%.

While it may not feel like it today, some day soon capital quality, not just capital volume, is going to matter.

Tags: banks, equity, inthenews, NCC, pncfinancialservices, treasury