The Chart That Cost John Mack His Job
The OCC is out with the most recent "OCC’s Quarterly Report on Bank Trading and Derivatives Activities Second Quarter 2009." We will provide a more comprehensive sweep of the quarterly report later, even as the pointless debates in the blogosphere rage over the definitions of gross vs. net exposure, and how $200 trillion is a big, big number (here's a hint, the only time you care about the distinction between gross and net is when you are about to have, or already are engrossed in, a full-blown liquidity crisis. And guess what: in a liquidity crisis gross is net. Bilateral netting and other fairy tale terms become meaningless when bank X, which just happens to be your counterparty on a few billion in swaps, becomes the next AIG, and when your attempts at collateral calls get a full voice mail box).
One thing that did however catch our attention, was the spread by commercial bank of any entity's Total Credit Exposure versus Risk Based Capital. And while VaR is a useful, if effectively gamed, metric for representation of instantaneous or periodic risk, this one is difficult to distort or present in a rosy hue. It is simply the ratio of an organization's Total Credit Exposure to its Risk Based Capital. As readers will recall, the rumored reason for Mack's demise was his unwillingness to take risk. And here is the proof. Comparing the relevant ratios between Goldman with Morgan Stanley, which had Risk Based Capital of $20.2 and $7.7 billion, respectively (respectably comparable), the surprise is evident when one compares the numerator of the fractions: Morgan Stanley's Total Credit Exposure was $95 million while Goldman's was $186 Billion: a TCE/RBC ratio of 921% to 1%! There is something to be said about having the taxpayer as a perpetual guarantor for any and all risk. In fact, Goldman's TCE to Risk Capital ratio was more than three times higher compared to the second riskiest organization: HSBC, which was at 304%.
The sad conclusion: the only CEOs who may have lost their jobs over the past 9 month period for their actions (or lack thereof) were those who did not take excess risk with shareholder capital, and did not abuse moral hazard, now made a financial doctrine compliments of Chairman Ben. And somehow Ken Lewis is still in his throne. Welcome to the new new normal.