Citi’s leverage: 280! (Leverage by the Numbers, Part 2)
As I noted in my last post, I was being charitable when I calculated leverage ratios for the big banks. Citigroup, for instance, has $165 billion of “Other Assets” listed on their most recent balance sheet. The company deliberately does NOT provide additional disclosure regarding what’s in that bucket, not in the quarterly OR annual filings. But an enterprising Bloomberg reporter seems to have tracked down at least one other intangible item lurking there, the same one that Fannie/Freddie counted as “capital”: Deferred Tax Assets (hat tip JL).
As of Sept. 30, Citigroup’s net DTAs were about $28.5 billion, after subtracting deferred-tax liabilities. That represented 29 percent of the bank’s common shareholder equity and a whopping 80 percent of tangible equity, which excludes goodwill and other intangible assets. On a gross basis, DTAs were even bigger; the bank hasn’t disclosed how much.
If you subtract that $28.5 billion from assets and from tangible common equity, Citi’s leverage ratio goes from 56x to, um, 280x. That’s because the denominator, tangible common equity, falls to only $7 billion. Over which we still have nearly $2 trillion of on-book assets. And again, we’re STILL NOT INCLUDING off-balance sheet commitments of $1.2 trillion. David Reilly in the WSJ recently estimated that they may have to bring at least 20% of that amount back onto the balance sheet. So the numerator in our leverage calculation continues to explode.
Everyone’s pointing at Citi because they’re the ones in the news THIS week. But mark my words, all of the other banks will come crawling to the Fed and Treasury, demanding that the government absorb hundreds of billions of losses lurking on their balance sheets.
This is short-termism at its worst. Sure the stock market is happy today that Citigroup isn’t going to fail. But what happens when other banks come calling and the $7 trillion bailout (Bloomberg’s number) balloons to $10 trillion? What happens when it’s clear there’s no way the government can possibly borrow enough to actually fund its guarantees?
On that day, I don’t want to be holding dollars.