The Wall Street Journal had a good piece yesterday laying out how we got from the $185 billion capital hole the stress tests initially turned up to the $75 billion hole the government ultimately announced. It was basically a series of case-by-case negotiations with banks over things like future profitability and credit for the sale of subsidiaries. Some of the individual numbers of are interesting (Citigroup got its capital hole lowered from $35 billion to 5.5 billion), but none of this is too surprising since, as I mentioned Friday, the government summarized the results of these negotiations in its own report.

There are, however, two points in the piece worth highlighting:

1.) Despite the recent criticism of these bank-regulator negotiations, there's nothing inherently nefarious about them. They're actually fairly routine. Per the Journal:

All the back-and-forth is typical of the way regulators traditionally wrap up their examinations of banks: Regulators often present preliminary findings to lenders and then give them time to respond. The process can result in changes to the regulators' initial conclusions. Some of the stress-test revisions, for instance, were made to account for the beneficial impact of the industry's strong first-quarter profits.

Now, maybe you want to argue that the government didn't acquit itself well in these negotiations. But the mere fact of negotiations isn't particularly damning.

2.) This is the one thing I didn't see explained in the government's report, and I'd like to know more since it seems to account for such a large sum:

On Friday, some analysts questioned the yardstick, known as Tier 1 common capital, that regulators chose to assess capital levels. Many experts had assumed the Fed would use a better-known metric called tangible common equity.

According to Gerard Cassidy, an analyst with RBC Capital Markets, the 19 banks' cumulative shortfall would have been more than $68 billion deeper if the government had used the latter metric, which accounts for unrealized losses.

We heard so much about tangible common equity in the run-up to the stress-test results that I kind of assumed it was synonymous with "Tier 1 common." But obviously that's not the case. And the Journal explanation made me do a double-take because I was already concerned about unrealized losses. I'll see if I can dig up a bit more on the relative merits of the two measures. Anyone with insights should feel free to e-mail me at in the meantime.

--Noam Scheiber