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Tangible Common Equity, or TCE

Tangible Common Equity used to be an obscure and rarely-used accounting term. Today it's one of the main motivators behind the government's decision to turn the American taxpayer into one of Citigroup's biggest stockholders. Senior Editor Paddy Hirsch explains.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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These explanations are excellent....PLEASE EXPLAIN ETNs and Leveraged ETFs!!!! Many thanks

I enjoy these whiteboards, but the TCE one has an error. In the example, the bank would have a negative TCE. The reporter accidentally double counts the equity and ends up calculating a type of tangible book value. According to the Federal Reserve, the formula for TCE is equity capital minus the sum of perpetual preferred stock and intangible assets. In the example, the equity capital is 45 (preferred) + 1 (retained earnings) + 4 (initial contribution) = 50. If you subtract the preferred stock, you have 5. Subtract the intangibles (45) and you have negative 40.

I'm not a big fan of TCE as it is most appropriate when you are valuing a bank under the assumption that it is not a going concern. Goodwill is tested for impairment, which means that--under the assumption that the bank will continue in operations--will the extra price they paid for their acquired businesses accrue to the benefit of the shareholders. So, if you assume a bank will continue operating, why lob off all of the goodwill?

I've enjoyed these whiteboards a lot is there any thought of compiling them in either print form w/ illustrations or a compiled DVD might be a nice incentive on the next pledge drive during marketplace
i'm a sustaining member but i'd add more to continue
shows like marketplace

I've enjoyed these whiteboards a lot is there any thought of compiling them in either print form w/ illustrations or a compiled DVD might be a nice incentive on the next pledge drive during marketplace
i'm a sustaining member but i'd add more to continue
shows like marketplace

Can some give a brief explanation on the usage of Omnibus Account and the Omnibus Regenaration procedure.

Thanks
Viral.

I think I got the mechanics from this whiteboard discussion, but what I am missing is why the TCE ratio is so important. After a little digging, I found this site: http://optionarmageddon.ml-implode.com/2009/02/23/tangible-common-equity/ I thought this was good info, but to sum up the TCE is important because it is effectively what shareholders actually hold a share of. In other words, if the company (bank) would fold today, the TCE is what gets divided up among shareholders. The TCE ratio, then, is a measure of how how leveraged the bank is with respect to tangible assets. So the TCE ratio is a measure of the amount of risk the shareholders stake is exposed to. Do I have that right? Thanks, and keep up the good work. mike

Great Catch Gordon and strong Recovery Paddy!!

I enjoyed both the post and podcast and passed on to friends and family eager to learn more about our financial fallout. As we continue our journey, could you do more regarding what implications any new legislation and regulation might do to our banking and financial system? What options are on the table now ? What did Glass-Stegal Bill do?

Gordon is dead right about the position of preferred stock on the balance sheet. A very basic error. So we did as he said and reshot the whiteboard. I'm pretty sure it's right this time!

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