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Subject:  Re: Wells Fargo (WFC) Date:  5/24/2013  11:03 PM
Author:  jackcrow Number:  143 of 886


Looking at data from Capital IQ, I see the following:
Debt: $194,551 mm
Equity: $158,991 mm

Where I run into trouble with banks is debt isn't the same for a bank as it is for other companies, it is their inventory. I deposit money or buy a CD and the bank incurs debt. They turn around a loan that money out paying me something for my trouble and keeping the difference to pay mostly SG&A and some infrastructure cost. What debt is 'debt' and what debt is inventory?

This makes the debt/equity ratio virtually useless during analysis. It is the size and quality of the book plus their risk management of said book that determines outcomes.

"Bank Capital" needs to be discovered. Some folks, including bank stress testers have taken to "Tier 1 Capital" which is equity plus disclosed reserves. "Tier 2 Capital" is most likely where the profits and risks lie and is harder to discover. One can use the "Capital Adequacy Ratio" to take one sniff at the risk profile of the bank. {Tier 1 + Tier 2 / Risk Weighted Assets}. It takes some serious digging and more than a few hours of green visor and +1 reading glasses to dig this data up.

FWIW As an equity holder I don't like Tier 1 Capital as a backstop to my risk. The first thing that goes out the window under stress is equity. Rarely, during work out, do the equity holders get anything. If there was any equity left in the company they likely don't "need" a workout but are going through a voluntary restructuring in which the equity holder still ends up holding the smelly end of a poop stick.

If I ever venture into investing in banks again it will be through debt issue. Dodd-Frank does a very poor job in addressing the next potential crisis and its "organized unwinding" will do me no favors as an equity holder. I'll loan banks money via savings, CD's and bonds.

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