Market fear reached such a high last week that JP Morgan CEO Jamie Dimon found he could not get on a plane to Saudi Arabia without arousing suspicions that he was attempting to raise money from oil rich Middle Easterners. As it turned out, he had gone to the grand opening of a new JP Morgan office in Riyadh. Many market watchers, however, jumped to the conclusion that JP Morgan could be in need of more capital.
Then again, just because you are paranoid doesn’t mean they aren’t out to get you. Yesterday we found an analyst report arguing that JP Morgan might need even more new capital than Citi. Could we be headed for another huge rescue?
From Financial Week:
Paul Miller at Friedman Billings Ramsey calculates that J.P. Morgan may require at least $188 billion in additional equity capital, compared with $160 billion for Citi.
Mr. Miller reckons that J.P. Morgan will need more capital than any of the the other largest banks—Bank of America/Merrill, Citi, Wells Fargo/Wachovia, Goldman Sachs and Morgan Stanley—or financial services giants AIG and GE Financial.
Though those companies have about $12 trillion in assets in total, their tangible common equity is just north of $400 billion, or about 3.4% of assets. And since tangible common equity is “the first loss position” when it comes to bad loans, that number is “simply too low,” according to Mr. Miller.
Mr. Miller assumes that banks need capital equal to 5% to 6% of risk-weighted assets to cover possible losses. If the underlying capital is financed in the short-term funding market, then banks should set aside at least 10% to 14% more to account for the possibility that short-term money could suddenly become less available.
Though J.P. Morgan has more tangible common equity, at $90 billion, compared with Citi’s $35.5 billion, J.P. Morgan also has more risk-weighted assets, at about $1.3 trillion, compared with Citi’s $1.2 trillion.
As such, the bank could need at least $127 billion to cover those assets, compared with almost $97 billion for Citi.
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