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European Banks on the Brink


Continent faces bigger losses than the US -- with less money.

The point, before we get to Europe, is that here there was a central bank and a government that not only could step in, but was willing to do so. I know former Treasury Secretary Paulson had his critics, but I'm not one of them. Sure -- he did some things that in hindsight, he might like to take a mulligan on. But he dealt with the problems in the best manner he could.

The time to have taken action was when we were making liar and no-doc loans and calling them AAA, or allowing banks to go to 30:1 leverage. Paulson had to deal with eggs that were already broken. That the system didn't crater is to his credit. Securitizing what he and everyone else should have known would be garbage while he was head of Goldman Sachs isn't, however, to his credit. But I digress.

I'm going to give you 4 charts showing the leverage of banks in the US, the United Kingdom, the Eurozone, and Switzerland. The bottom, blue portion is assets to common and preferred stock; the red is assets to common equity, which can include good will; and the purple is assets to tangible common equity.

Tangible common equity (TCE) is all the rage, and that's what the recent stress tests measured. In opposition, there's tier-1 capital, which includes preferred stock (this would basically be the blue portion). TCE only includes common shares.

Now, let's start with the US. These graphs show leverage. The average leverage of tier-1 capital of the 5 largest banks is in the range of 12:1, and is actually down from 10 years ago. (A very good and simple explanation of all this can be found here.)
No positions in stocks mentioned.

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