Saturday, April 25, 2009

A Measure of Confusion

Today's chart is not hall of fame bad, but it does fall into the category of confusing and pretty much useless.

The chart accompanies an article in the New York Times (4/25/09) about the health of regional banks. In trying to convey how healthy various banks are, the Times created a chart that shows the Tangible Common Equity Ratios for 16 banks. The introductory paragraph explains that this ratio measures how leveraged a bank is which it says is a good indicator of financial health.

The explanation for this simple bar chart also indicates that "a ratio of 3 is acceptable". According to the chart Bank of America has an acceptable ratio of 3. What it doesn't tell us is if U.S. Bancorp at 3.2 is better or worse, or if Wells Fargo at 2.5 is better or worse.

One thing about a confusing chart is that it can force one to actually read the article. So I did. Unfortunately, the article does nothing to clarify the meaning of the chart. In fact the article text actually confuses the issue further. The text indicates that Goldman Sachs, Morgan Stanley, State Street, Bank of New York, JP Morgan, and US Bancorp are "among those best positioned". Yet their Tangible Common Equity Ratios range from from 2.1 to 5.2 in a total range of 1.7 to 6.4.

The article also says that BB&T, PNC, and Wells Fargo "face a coming wave of heavy losses", yet their Tangible Common Equity Ratios are 5.1, 2.3, and 2.5 respectively.

Perhaps the only thing that might give us a clue as to which end of the ratio spectrum is the "good" end would be the comment that Regions, SunTrust, and KeyCorp are all probably in need of billions in additional capital. Somewhat lumped near each other at 5.4, 5.7 and 6.1. This would suggest to me that the higher the ratio the worse off the bank is.

Although with all the talk in the media about how bad off Citigroup is, it is hard to understand how it manages to have the lowest ratio of all the 16 banks at only 1.7. Maybe that footnote about Citi's ratio going up after the government's investment in preferred stock being converted to common stock would change their ratio drastically to put them at the other end of the spectrum.

So, after spending all of this time reading the article, studying the chart, and writing this post, I think I feel comfortable saying that the higher end of the ratio spectrum is bad and the lower end is good. BUT THE POINT IS, A CHART SHOULDN'T REQUIRE THIS MUCH WORK.