Tangible Common Equity

Tangible Common Equity (TCE) is defined as equity capital (common stock) of a bank, less goodwill and other intangibles (net worth). It indicates the borrowing capacity or strength of a bank or what common shareholders would get if the bank were dissolved. Intangible assets like goodwill don't produce any income and therefore don't have a cash equivalent value.

Regulators have determined that TCE is the key indicator to follow in their stress test evaluations. Some experts believe that a TCE ratio of 4% to 5% should indicate enough strength for a bank to stay solvent in a deep recession. The nineteen top US banks received TARP funds in the form of preferred stock which carry a dividend of 5%. The Obama administration hopes to convert the preferred stock to common stock thereby eliminating the 5% dividend and increasing the banks cash flow. This conversion would increase the TCE ratio for the bank and dilute common shareholders. The only bank that has agreed to convert is CITI which will see its' TCE ratio go to 5% or above after the conversion.

In summary, on May 4th regulators will release the results of the stress tests which will indicate which other financial institutions will have to dilute their shareholders by converting the TARP preferred stock to common stock.

Random thoughts....Swine flu is the talk of the day.....will the markets ignore it and go up anyway? ..GM unveiled another restructuring plan ....will it succeed....Obama's first hundred days are over...what do you think? ...look for regional banks with large commercial real estate loans to get low grades from the stress tests.....potential large banks that will have to raise capital include Wells Fargo and Bank of America...

Dear Mr. President Please Act Now on my plan

President Obama has the power to change the course of the Great Recession of 2008-9 by following these steps:

1. Suspend the accounting rule of Mark-to-Market for two years. This will take the pressure off of the various financial institutions that have seen their Balance Sheet collapse.

2. Suspend Capital Gain taxes for any individual buying United States stocks in 2009. Give the American people a chance to invest in their country and keep 100% of all gains so that they can recoup some of their losses.

3. Use the rest of the TARP money to make sure that the banking system doesn't fail. There are a number of reasonable plans to remove the 'toxic assets' from the books of major banking institutions. Make a decision by Monday on whichever method will satisfy the financial community.

4. State that the US Government will not dilute any Senior Corporate bonds in any restructuring of a non-bankrupt Corporation. In addition, instruct the Federal Reserve to begin purchasing investment grade Corporate bonds next week (at least $500 Billion).

5. Force General Motors into a pre-packaged bankruptcy that is financially supported by the government. Inform Chrysler that they are on their own.

Mr. President, if you take these steps within days you will create a stock market rally of 25%.

In addition, you will stop the downward spiral in the world's economies. People around the world will have confidence in your ability to lead and to create confidence. It is time to lead us out of this great recession.

Bank of the United States

Is it possible for the United States government to own our largest banks? Will Bank of America, Wells Fargo, Citi, and JPM be owned by the USA by the end of 2009? As the economy heads to depression (20% chance), the banks will need more and more capital to stay in business. President-elect Obama will pull out all of the stops. He will have $ Trillions to invest in our country. If the decline moderates, the banks will get stronger. If we enter a period of deflation and depression, the banks will be nationalized.

My hope begins next Tuesday. Consumer psychology can turn on a dime. The new President will instill confidence in his leadership abilities which will lead to consumer confidence. As I have said, the demand for products and services has dropped precipitously in the last four months. It is up to the new government to change this psychology.

Random thoughts......forget about seeing the movie CHE......today is option expiration day on Wall Street......I worry about the stock of GE......no market on Monday. ....it is MLK day.....I hope the pilot of the US Air plane is honored by President Obama......Who will be the next senator from New York?

Time if of the Essence; The Second $350 Billion

President-elect Obama today asked Congress for the Second $350 Billion from the Tarp(officially President Bush had to ask for it). Congress has fifteen days to reject the Obama administrations demand for the funds. Will this Congress stand in Obama's way during the first few days of his new government? This answer is most probably yes. It seems that Nancy Pelosi & Barney Frank want Barack Obama to understand that they will be participating in the final decision. The first $350 Billion was invested in the Banking system to prevent a depression. It is time to deal with the housing crisis by dealing with foreclosures. I believe that Obama will focus on this issue immediately. Time is of the essence!

Random thoughts- Will Citi & Morgan Stanley merge their brokerage units?...yes , look for the announcement within 24 hours....Morgan Stanley will be the Firm with the most retail stockbrokers....all dividends on banking stocks are in question...look for the elimination of dividends within months....2009 starts out with the best actor at the Golden Globes being a WRESTLER....no wonder the market was down today..where is the Obama rally? any day...

Eleven Days to Go

In eleven days, Barack Obama will become the 44Th President of the United States. For the last few weeks, he has been trying to change the psychology in the markets. His economic speech this week gave us a glimpse of his plan. It seems that he will do whatever is necessary (more than $1 Trillion?) to turn this economy around. He will present the world with a leader that wants to solve problems. He doesn't want politics to get in the way (keep Nancy Pelosi quiet). Hopefully, this change in psychology will lead to a honeymoon with the markets. The so called OBAMA RALLY should begin sometime next week. We should expect continued negative economic news for the next few months. The combination of a President who is a world leader and a massive economic spending plan will lead to a significant rally. What if we don't get the rally?

Random thoughts....4Th Quarter Earnings reports begin next week...hold on to your seat.....will negative news be discounted or will it lead to a test of 7800....what about Robert Rubin quitting Citi....or the merger of Morgan Stanley's brokerage unit and Smith Barney....in Eleven days, the world will change forever.....