Who Is John Paulson, And Why Should The Globe And Mail Care?

Tyler Durden's picture

They say that the simplest analysis is always the most powerful one. That appears to certainly have been the case with our presentation of global banks' Tangible Common Equity ("TCE") ratio to total assets from last Thursday, and specifically our observation of the glaringly obvious, namely that of the 30 most undercapitalized banks in the world, Canadian ones represented a whopping 33% of all. Note: this was not an attack on Canada, this was not some hedge-fund inspired start of a bear-raid on the Canadian banking system, this was nothing but an attempt to warn our readers of, again, what is out there for anyone (who is not blinded by cognitive bias) to see for themselves. Alas, the reaction to that post, particularly in the Canadian media, has been swift and severe, provoking such respected publications as The Globe And Mail to pen not one but two responses, one being the by now so-oft discredited attempt to ignore the message and target the messenger (Who is Zero Hedge, and why should we care?), followed by a more coherent attempt to debunk the claim that a painfully low TCE ratio is never a good thing (Is Zero Hedge looking at the wrong numbers?). The argument of G&M's Boyd Erman boils down to the statement that TCE is not a fair indicator of balance sheet stress and instead one should focus on a "Tier 1" approach of risk estimation, one that includes Risk Weighted Assets. Here we could provide the reference to Lehman's Tier 1 ratio, which was well in the double digits on the day when it filed for bankruptcy, even as the bank's true leverage was about 40x, a number which eventually brought on the biggest bankruptcy in history. We could but we won't, instead we will ask, rhetorically, who is John Paulson, and why should the Globe and Mail care?

Because while those "oddballs" at Zero Hedge may be hyperventilating or whatever the verb du jour may be, the (one time legendary) hedge fund's opinion probably should count for something, even in the G&M's esteemed opinion. And specifically his take on the whole Tier 1 vs TCE debate...

Back in March 2009, John Paulson (when he still was actually making money for his LPs, perhaps because he was rightfully quite bearish on the financial system, and wasn't running the world's smallest mutual fund) and JPM's Chairman of China Equities, Jing Ulrich, sat down and discussed the then-imploding economy, in a Q&A which we are confident is about to get much more airplay over the next several weeks. What is most notable about this discussion, in addition to what a difference two years can make to a person's P&L and outlook on the world, is that it was Paulson himself who chimed in, well in advance of the current debate on TCE vs Tier 1, with his personal thoughts on the issue. We present them below as we preemptively answer the rhetorical question posed above with a resounding yes.

Jing Ulrich: Things seem to be getting worse in the financial services area – how much worse is it going to get? Do you think we now know the true extent of the underlying problems?


John Paulson: The problem with financials is that they are very leveraged and don’t have enough tangible common equity to absorb anticipated losses. Large American and European banks have on average 40:1 leverage, defined as Total Assets / Tangible Common Equity. The Tier 1 capital ratios commonly used by banks present a misleading picture as to the capital adequacy of banks. The Tier 1 ratio includes preferred stock, hybrids and subordinated debt as capital and then risk weights assets, leading to a risk weighted asset number that is much less than the total asset number. This can lead to a situation where banks have high Tier One Ratios but very low tangible common equity ratios (see graph below). As a common shareholder, we only care about tangible common equity.

Hence, while we are confident that McKinsey is more than capable of putting together any analysis goalseeked as per the paying customer's demands (because at the end of the day, consultants and rating agencies are the same: they both tell their clients what they want to hear, and somehow this is only now being discovered for S&P and Moody's), we will go with the facts, as per what the world's (once upon a time) most vaunted investor had to say.

So while we relegate this simplistic debate over whether TCE or Tier 1 is more appropriate (best to just ask Dick Fuld) to the compost heap of legacy media click-thru monetization attempts, we leave our readers with the following far more fascinating interview with John Paulson, which provides some much overdue flashbacks to why he was, at one time, one of the world's most respected asset managers. Something tells us the topics discussed in it will become yet again quite salient in the immediate future.


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TomJoad's picture

Oh Snap! Nice one Tyler.


Jump! You Fuckers!

Earl of Chiswick's picture

Tyler, your Canadian Bank post was a stroke of brilliance. As most know canucks are an insecure bunch that continually need to be stroked.  To suggest and simply pose a question about the soundness of Canadian banks was tantamount to asking an insecure woman if she's put on a few extra pounds even if she hasn't.

  I suspect that if you post something/anything about Canada once per week you will quickly become the most read author in Canadian history.


PS did you see the canuck CDS spreads widen?  What is Rosie's view of canuck banks? 

I'm sure his Alma mater Gluskin+Sheff were thrilled to see your post.


PSS I wonder if you will be making the canuck version of the no fly list?

asdasmos's picture

Hey Globe & Mail...... what now?

redpill's picture

They are probably just realizing that they are way out of their league.

Earl of Chiswick's picture

I expect that Boyd Erman (cub reporter extraordinaire) will soon be replaced with some big dogs (or if they are smart they'll never tangle with nor mention ZH again).  But as a point of clarification in his article on the "numbers' he did not mention tier 1 but instead TCE to Risk Weighted Assets as an alternate to the TCE ratio you are using. 

Tyler, what are your thoughts on the use of that ratio?


from Mr Erman's (cub reporter) article


It doesn't appear that McKinsey looked at the debate over which TCE ratio to use. What the analysts did find is that as the TCE/RWA ratio rose above 7.5 per cent, the likelihood of banks getting into distress declined sharply. Below that level and banks started to get into trouble.

And in that case, Canadian banks, with average ratios over 10 per cent, look very strong.

Tyler Durden's picture

Anything that is "weighted" invites accounting and GAAP gimmickry, and first degree abuse of Mark to Market, which obviously is suspended everywhere in the world.

It is suspended for a reason.

The reason why TCE is the only one that matters is because it gives the least opportunity to adjusted either the numerator or the denominator.

One can read much more about this topic in one of our earliest posts.

Kayman's picture

Hey Tyler

Ask Boyd about the Dome Petroleum re-write of Canadian Banking law.  ALL THE CANADIAN BANKS WERE BROKE.  But the Canadian government re-wrote the law to allow them to write off their bad debts over 5 years instead of 1 year. Quietly stuffed under the carpet.

It is all smoke and mirrors.  Most Canadians eat pablum every day just like americans.

vamoose1's picture


    They also rewrte hundreds of years of Canadian Securities Law in the  Dome Petroleum deal, The Supreme Court of Canada abrogated the rights of preferred shareholders, and nullified our votes,  which were 4 to  1 against the rape ..  Same bat time,  same bat channel.

rocker's picture

If honest Mark to Market is reinstated and required one will be able to decicde if the banks are a buy.

Not until then. Without Mark to Market all banks and investment houses need a 50% discount to present price.

billsykes's picture

I would like to see this information, where did you find it?


Kayman's picture

Sun, 08/21/2011 - 12:30 | billsykes

Dome Petroleum and Smiling Jack Gallagher- early 1980's when interest rates sky rocketed.  Olympia and York, Canary Wharf and the magical Reichman brothers PACR.

spiral_eyes's picture

Globe & Mail just got owned by pure empirical fact.

Bananamerican's picture

Give 'em a post...here's mine

ZeroHedge is simply THE best source for economic/political news on the web today.
Why? Because the editorial voice of ZH is both deeply knowledgable and profoundly SKEPTICAL (correctly so...) and because the comments are unmoderated, something much closer to the Truth can emerge from the scrum.
The Main Stream Media?
I scan it for the Official line...and see it for what it is...Propaganda

Fedophile's picture

+ ?

Edit: Tyler, there is a small bug in the UI. If you post with the HTML <p>+ &theta;</p> the pieview is as expected but once it's posted you get the much lamer + ?


Earl of Chiswick's picture

Thanks that post was before my time. You may want to double check M2M ban as I don't believe canuck banks adopted the mark to make believe that their US counterparts (FASB) did.


I agree that basic TCE has the least opportunity for shenanigans but at the same time to lump exposure to for example greek feta versus canuck cheddar can also distort things.

Do you know which TCE Meredith uses? If I'm not mistaken I  think it's TCE to Risk Weighted Assets.

Tyler Durden's picture

One quick question: who "weighs" the risk and on what basis? Canadian cheddar is less risky today because the herd hasn't realized it could be just as risky as Greek feta tomorrow? Read Corrigan's guest post from Sunday on how risk perception paradigms change not overnight but in an instant when denying reality becomes impossible. And 100 points if you spot the circularity in saying Canadian cheddar is less risky so assets that are collateralized by it are safer?

But back to the Corrigan piece. The following paragraphs on why instantaneous "risk" is the most misunderstood concept in the world, should be read by everyone who deals with any form of risk management (and certainly weighing):

From The Sun Chairman, What's Future Is Prologue, And Why The Second French Revolution Is Coming To America

A long time ago, we first wrote about what we had come to recognise as the bipolar tendency of financial orthodoxy to undergo opposing, Kuhnian revolutions of its Groupthink every six to twelve months, or so.

Typically, the players first persuade themselves of the validity of an often arbitrary, but usually bullish, scenario which, by dint of constant repetition and uncritical mimicry comes not only to serve as a dogma, but one which each believer professes to have discovered for himself. Along the way, all objective data and governmental statistics which can possibly be construed to support this scenario are talked up and re-transmitted in confirmation of the first idea: those which cannot be so re-interpreted are simply ignored as ‘outliers’ by all except the small cluster of much-derided contrarians and habitual Cassandras.

Eventually, as the trend matures and its espousal becomes near universal, it begins to lose its onward momentum. Now, for the first time, the dissonant evidence, which has long been accumulating, begins to excite a certain uneasiness in the Jungian mass consciousness.

Finally, the trend turns – sometimes to, but often absent, the accompaniment of some unanimously-recognised trigger event – and the first losses start to be taken by those latecomers caught in the reversal. As each successively lesser, Greater Fool sells out, cursing himself that he always buys the top, as he does, he encourages another of this time’s Smart(er) Money men to quit while he’s ahead, too. So, each initial trickle dislodges more and more of those clinging precariously to the edges of a now-vertiginous slope below, until the first, trivial setback snowballs its way into a screaming avalanche of head-in-the-hands liquidation.

Now, at this point of maximum dislocation and mental discomfort, all those inconvenient developments which should have long since called the move into question are suddenly rediscovered and - lo! – they crystallise instantly into the foundational themes of a counter-trend of equal and opposite conviction.

Sadly for them, the earlier naysayers will find no belated applause for being right, being despised for their pusillanimous refusal to play the game if they say, ‘I told you so’ and being anyway doomed to seeing their premature insights co-opted shamelessly – and without the slightest attribution - by the post hoc rationalisations of a consensus-hugging crowd soon avidly blowing themselves an anti-bubble to replace the inflated soapskin of ill-starred hope which has just imploded all around them.

So it has been here, too, with the Shock! Horror! Hoocoodanode? of the downwardly-revised US GDP numbers; the farce of the WWF grand slam which was the Federal budget dispute; and the ritual slaying of the sacred cow of that nation’s undeserved prime credit rating.

Up until that point even the yawning cracks opening up around the foundations of the Eurozone could largely be ignored in the eagerness to buy a small section of Blue Sky, but, once sufficient self-doubt was ignited in some corner of that Gordian tangle of correlated and cross-margined trade in which the near-free leverage of QE-II had enmeshed everyone, that ongoing turmoil also became one of the defining features of the new bearishness and its expression in market pricing became violently intensified as a result.

So the first sparks of panic were struck to find a ready kindling among the garish paraphernalia of illusion piled high behind the flats and tableaus which comprised the backstage clutter in the Theatre of the Absurd where the ‘Great Global Recovery’ play had been enjoying its unbroken, 15-month run.

In time-honoured fashion, a mad rush for the exits soon followed.

Stax Edwards's picture

And that so succintly desribes why I for one cannot ignore the Hedge.  Cheers TD, don't forget about us little guys when the IPO comes.

Spitzer's picture

I remember Bernanke saying in 2006 that household debt to equity was still low. But Peter Schiff pointed out, the debt was feeding the perceived equity value.

Just like now, the US govt debt to GDP is "not that high" but its the debt thats feeding the GDP.

citta vritti's picture

and IIRC, in recent years, chasing shibboleth of ever growing GDP has required more and more debt per unit thereof, until now we find the GDP is insufficient to feed the debt. Jubilee anyone?

Spitzer's picture

Tyler Durden on BNN Canada "we don't know who he is but....


Bay of Pigs's picture

Their guest wasn't too kind to TD or ZH.

"Gutter journalism"?

Reese Bobby's picture

Consider the source.  Worthless WASP...

speconomist's picture

Looks like promising material for a "Tyler Durden was right" video in the future.

Reese Bobby's picture

Duke scum.  What kind of a dip-stick uses current LTV's on mortgages to refute the possibility Canada might have a housing bubble.

I am confident Vancouver, e.g. define housing bubble.  Hoser.

o2sd's picture

Thanks, that was a good laugh.

ZOMG, 7% of Canadian Mortgages are under water!!???? Canada is soooo forked.


Kayman's picture


Here's hoping you like power more than money.  I imagine a check for $1 billion could be drawn on Berkshire's account. 

slewie the pi-rat's picture



slewie thinks tyler likeZ publishing and has a tiger by the tail, here, too

which is why slewie writes: for tyler to publish my work & ideas, right along w. his, and yours, also

free speech here and only here


Kayman's picture

slewie the pi-rat

Love your sentiment, but Benny bucks can be created in a keystroke.  Benny's masters would love to buy Tyler's soul.

slewie the pi-rat's picture

what, exactly, do you see as my "sentiment" ? in this (paste):

slewie thinks tyler likeZ publishing and has a tiger by the tail, here, too

which is why slewie writes: for tyler to publish my work & ideas, right along w. his, and yours, also

free speech here and only here (end paste)

could you please tell me exactly what you are talking about?  i am actually confused by what you present as "slewie" here

you go ahead and fantasize about whose souls "Benny's masters would love to buy..." with their "keystroke bux"

how's that going, huh? 

if you are convinced that tyler is either looking for the bux to sell out, or unable to protect himself, please indicate why.  other than that, my friend, please stop projecting the drama of your 'soul' v. 'whatever' onto tyler, ok?  it doesn't seem to me to be working v. well, here, today, if you catch my drift...

Kayman's picture

slewie the pi-rat

what, exactly, do you see as my "sentiment" ?

You're going a little bit rat-shit crazy on me slewie.  If you are trying to tell me that the TD's are incapable of being bought, then that is sentiment my friend.

Other than that, following your train of logic is a bit like reading entrails.

slewie the pi-rat's picture

you seem confused abt what i am saying about tyler, puddin-head, so "slewie" must be out there, eh?  actually, you are confused, but it rilly isn't slewie's fault!

at least what i said could be followed logically as a train of thought, son, even if you couldn't understand its meanings, for some reason...

you didn't make that cut, didya?  and maybe my thoughts wouldn't be so shitty, if you had, mr jelly-mind boo-boo "soul" man, been a tad more "logical" here, yourself, especially when gratuitously attacking tyler with what is, at best, a hunch, and almost certainly, at this point, a hallucination-projection about your own "worth" as a semi-conscious faustian plant, here

hey!  life's a BiCh, and then, you turn into one!  eh? 



Kayman's picture

slewie the pi-rat

"when gratuitously attacking tyler with what is, at best, a hunch, "

A rat ought to know a bigger, more rotten piece of cheese is infinitely more attractive. You know damn well the PTB would love to crush dissent. So my question is legit and I am certain TD can sustain the "injury" of the question without his self-appointed long-tailed side-kick squirming around trying to defend him.

When trying to follow your disjointed train of logic, I am not certain whether you smoke crack or just sniff crack.


ps. I doubt that you are old enough that I could be your son.  Now go back to  babbling in the corner.

Earl of Chiswick's picture

Most excellent that you have taken the time with a detailed response, thank-you.


So to summarize: any leveraged vehicle is insolvent if it gets a cash call.

slewie the pi-rat's picture

nope & no cigar for you, earl!

consider the micro-econom example of a corp using bal sheet leverage successfully with some kinda callable debt, if you would, or renewable paper which doesn't get "re-newed" which wld make the corp a "leveraged vehicle" would it not?

this does not make the corporation insolvent

likewize with a person as a vehicle who has debt, for "leverage" 

assuming you know what "insolvency" means, try thinking, here, ok? 

and tyler:  nice "Who is John _____"!  i liked that!

Earl of Chiswick's picture

au contraire petit(e) slewie

today's subject matter is banks maybe even sovereigns and the quality of the capital backing their leveraged asses as in:

"Hello Dick, this is Lloyd and it's Tuesday, I hope you know a good orthopedist"

Kayman's picture

Earl of Chiswick

Receptionist, " Mr. Blankfein, you still have Hank holding on line 2. "

slewie the pi-rat's picture

is it?  Who Is John Paulson, And Why Should The Globe And Mail Care?

now, if you are gonna claim to have been speaking about "banks and sovereigns" before, why didn't you simply say so, instead of writing:  any leveraged vehicle as you were "innocently paraphrasing" someone.  incorrectly

...while playing "gotcha" (you can look that up, too, shitforbrains) w/ tyler and slewie...and making an ass of yourself here.  again.

we know who lloyd and dick are, too.  the fact that you seem to, doesn't excuse what you are doing on this page and how you are so pitifully attempting to do it. 


WonderDawg's picture

Dayummmm, Slewie. If that wasn't a proper verbal bitch slap, I've never seen one.

knukles's picture

What is the Daily Mail asked John Paulson and who the fuck cares, anyhow?
The more panties on a bunch, the better to play with.
Or something or other like that somtimes.

anonnn's picture


Who defines for YOU what "risk" is?

That cuts to the marrow of the confusion.

Yen Cross's picture

Do Not get me started.>  Clint Eastwood<  POOF>>>

Bob Sacamano's picture

As for me, being praised or getting attribution for ideas or not being despised for being contrary does not do much for me.  Making money off movements in the markets is more rewarding.  So being right in word is much less fulfilling then being right in deed -- for me any way.  Thanks for the forum.

treemagnet's picture


You smart, me dumb. 

Tyler, you must wax the market when you trade - or when you did trade.  At least tell me you had to use a thesaurus to write this.  Who are you by the way?

vast-dom's picture

Thank you TD. I read both G&M articles more at responses and sniggered all the way through; to term their contrarian snide tone tenuous is too kind. They had NOTHING on you and your article save for that which plagues most sheeple: fear of the obvious!


May I give the G&M a nice acid-bath vagina now?



Canaduh's picture

I believe I have the last word in this matter, and that word is rainbowkittensprinkles.


 Carry on.

Going Loco's picture

Ah, 'our'. Thought so. No matter. Keep it coming. Strength in numbers, don' y' know.

narnia's picture

i'm not sure either of these ratios tell you very much.  anyone can carry infinite assets, no matter how levereaged, with ZERO interest rates.

Growyourownfood's picture

Tyler, please talk about loan origination. The TCE ratios have no value without looking at loan origination criteria of what is held by the banks. The loans issued in the US real estate market which subsequently caused its destruction were never made in Canada and arent being made today. The two markets are not even remotely comparable.