This chart comes from today’s WSJ, and shows the big difference between tier-1 common capital, which is the criterion that Treasury ended up using in its stress tests, and tangible common equity, which is the criterion everybody thought Treasury was going to use in its stress tests. And you can see why Wells Fargo, in particular, was livid about the switcheroo:
Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as “asinine,” were particularly heated, according to people familiar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed’s findings.
Remember that the numbers in the chart are as of year-end 2008, not the year-end 2010 figures used in the stress tests. But judging by where Wells is right now, it’s 90 basis points short of the 4% common capital ratio, but only 10 basis points short of what everybody thought was going to be used: a 3% TCE ratio.
Banks like Bank of America and PNC, however, clearly benefitted from the change: they’re both short on TCE, but have much more than 4% tier 1 common capital.
Why did Treasury switch from TCE to the even-more-obscure common capital metric? Quite possibly to help Bank of America and Citigroup get the amount of capital they needed to raise down to a number within the realms of possibility. After all, these tests were designed so that they couldn’t be flunked. And that might have seemed a real possibility back when Treasury was still using TCE.