We were more than a little surprised to read a Bloomberg story on March 10, which reported that the Federal Reserve was giving banks a hard time over its latest stress tests, particularly on the possible losses on consumer debt if the economy were to take a dive. The story indicated that if the Fed held tough, major banks would be restricted in making dividends and buying stock. This seemed to be quite a volte face from the Fed’s previous “give banks everything they ask for and then some” posture. But some Fed defenders argued, no really, once the banks were out of confidence crisis land, the regulators always planned to get tougher with them about building up their capital bases.
If today’s Bloomberg story is accurate, whatever resolve the central bank had was awfully short lived:
Wells Fargo & Co. (WFC) and Citigroup Inc. (C) may join banks unleashing more than $9 billion in dividend increases and share buybacks if they get passing grades this week on the Federal Reserve's annual stress test.
Thirteen of the 19 largest U.S. lenders may say they'll pay out $3.79 billion in extra dividends this year and buy $5.52 billion of additional shares, according to estimates of six analysts compiled by Bloomberg. That's 30 percent more than they spent last year. San Francisco-based Wells Fargo probably will offer the biggest difference at a combined $4.16 billion, followed by Citigroup with $2.92 billion.
Now narrowly speaking, the two stories do not contradict each other. The later, cheerleading story, reflects analysts’ expectations, not any new information from the Fed. The earlier piece also noted that Mr. Market would be disappointed if the big banks (ex Bank of America) were restricted in their use of funds.
Now if we really believe that the Fed might have concerns about the solidity of bank balance sheets, which would be consistent with their super low interest rate largesse, why might they back off? Political scientist and leading expert in money in politics Tom Ferguson points out that any Republican presidential nominee, including Romney, is certain to be tougher on the Fed that Obama would be. He argues if the Fed proves to be generous to the banks, its motivation is likely to include the idea that the banks will start being more generous to Obama (and Bernanke) since the Fed continues to watch their backs.
The Fed has released its methodology for evaluating the banks (hat tip reader Deontos). It describes a much more adverse scenario than was included in the 2009 stress tests:
…a deep recession in the United States, significant declines in asset prices and increases in risk premia, and a slowdown in global economic activity… real GDP is assumed to contract sharply through late 2012, with the unemployment rate reaching a peak of just over 13 percent in mid-2013. The scenario assumes that U.S. equity prices fall by 50 percent from their Q3 2011 values through late 2012 and that U.S. house prices fall by more than 20 percent through the end of 2013. Foreign real GDP growth is also assumed to contract, with growth slowdowns in Europe and Asia in 2012.
Sounds like Lehman lite, and the more dire scenario is based, as the report indicates later, on concerns about the Eurozone. The Fed stresses that this is a scenario and not a forecast.
This in fact is pretty grim, and I would have trouble believing that the Fed could justify anything other than having the banks build up more in the way of capital buffers. As we’ve discussed repeatedly, the four biggest banks have residential mortgage second liens that based on the most recent data are valued at $369 billion. My understanding is that they are marked at between 80% and 90% of face value (JP Morgan may have written them down a bit more) when second lien paper is trading in the secondary market at 30 cents on the dollar. If you assume an average of 85% of face and it needs to be 30%, that $369 billion is really $130 billion, meaning you’d have a nearly $240 billion hit. And that’s just a realistic current mark, not taking into consideration the extra damage occurring in the new stress scenario.
In other words, if any of the big four banks are allowed to pay dividends or buy back stock this year, you should regard it as a bit of electioneering by the Fed. The banks have a long way to go before they are healthy, and the central bank knows even as it pretends not to know that for public relations purposes.
“Lasciate ogne speranza, voi ch’intrate”, or “Abandon all hope, ye who enter here”
Wise advice to the Fed.
Just a trivial note on “austerity.” Yves’ title — “Is the Fed Going to Go Easy on the Banks to Help Obama?” — is translated into contemporary Hawaiian Pidgin as — “Da Fed, goin’ go easy on da banks fo’ help Obama? (11 words vs. 13)
Could you at least provide a link when you make a risible claim that ALL of the GOP candidates would be harder on the Fed than Obama. I’m not saying it’s not true, but it’s hard to believe that Romney would even support a Fed audit, and it seems unlikely that Gingrich or Santorum would actually want to put bonus-limiting strings on Fed disbursements.
When reading “Republicans will be tougher on the fed” I assumed Ferguson was speaking of the conventional wisdom on the Right over several decades: loose money brings unacceptable inflation.
That is not exactly the same thing that’s being discussed here, re: capital requirments.
Come on, every Republican candidate ex Romney has dumped on the Fed. Santorum and Gingrich have trashed talked the bailouts too. The only one who has been a bit coy is Romney and even he’s been awfully friendly to Ron Paul, as we noted in a cross post from Mark Ames.
By contrast, Obama reappointed Bernanke despite his colossal failure AND whipped personally to get the reappointment passed.
They’ve all dumped on the Fed, but there’s no evidence that they’ll be insisting on stronger capital requirements for the big banks, as opposed to even more regulatory forbearance. In fact, I think it’s hard to suggest with a straight face that the GOP candidates would refrain from attacking Obama and the Fed as Socialists, if they actually did insist on reserve requirements (not that this excuses the administration/Fed). Conservative posturing toward populism doesn’t actually lead to populist policies. It’s generally just a cover for even worse Libertarianism and Crony Capitalism. Besides, Gingrich and Santorum were both huge Greenspan fans. The anti-Bernanke dance isn’t substantive, it’s just scapegoating. What we need is to re-assert political sovereignty and transparency at the Fed, not blame the entire economic crisis on one person and change the deck chairs on the Titanic.
I have to agree in part. While they have dumped on the FED my sense is that Gingrich and Ron Paul would rather do without it entirely (a-la Mieses) and let “the market” take care of this rather than impose any additional regulation.
Santorum will criticize it but I don’t sense that he cares much. When he was Senator he would vote with the party on financial issues. He was only interested when the culture wars were involved. Based upon that I expect he would support or at least sign legislation to “streamline” things but probably not rock the boat too much by getting rid of things.
Romney, on the other hand, made his money on a Wall Street that was supported by the FED. I doubt he’d kill the money printers. Rather he would try to transform them back to a shop that supports the banks not the people and, if Wall St. needs another bailout, he’d listen.
I agree they’ve all been beating up on the FED but it’s an easy target.
Doesn’t the Fed have a traditional Republican bias during election years?Or is it different this time? ;)
You are right Min, hence the Fed’s support of Obama.
Right. Obama is the best Republican President since Hoover. ;)
Because of the faux populism that stinks up most R campaigning, they’ll have to Do Something that looks like reining in the Fed. Think Apache Dance rather than Apache raid.
Because of Barry’s faux scientifism, he can get by claiming it’s all above the heads of nonspecialists. And if that doesn’t work, he’ll just play the race card.
nice…kick the can down the road a bit further…
No, Bush I has said he thought he lost in 1992 because Greenspan cut rates 6 months too late. By contrast, during the Clinton years Greenspan instiutionalized the Greenspan put, and the perception of support to the stock market no doubt worked to goose market averages and helped Clinton.
But let’s not forget how Arthur Burns allowed inflation to take off rather than raise rates and endanger Nixon’s re-election. And ever since the right has been flaming LBJ’s Great Society for the inflation actually caused by Republicans.
hmmnnn….I felt Perot split the vote, giving election to Clinton…In a way (I remember) we faced economic problems then-Como was interviewed on Armed Forces radio Europe, and stated Clinton would win, as he had most $$$$ backing…though Tsongas and Paul Simon had won first two primaries.
The Greenspan factor I thought caused Clinton administration to look better than they were-Stiglitz’ book makes mention of fortuitous timing-positioning. I don’t believe Clinton was any economic guru…look at the mess he made of deregulatory legislation, admittedly at the behest of Texas repubLIEcon Senator Phil Gramm..and NAFTA was a disaster that keeps on giving, just as Perot foretold…
"The Federal Reserve was giving banks a hard time over its latest stress tests, particularly on the possible losses on consumer debt if the economy were to take a dive"¦.etc."
I'm confused.
I thought the big banks >ARE< the Fed.
The big private banks own most or all of the shares in Fed member banks and regional banks, yes? If that is true, then to think that the Fed is somehow different from the big private banks that own it is to maintain the delusion that there is some government or quasi-government body that has power over the big private banks.
There is only one power in this nation: the Fed (i.e. the big private banks).
I'm sorry if this undermines a lot of useless chatter among people, but truth and reality often have that effect. My apologies.
“or buy back stock this year, you should regard it as a bit of electioneering by the Fed.” -
Maybe OT, but IBM did it recently while they fired thousands, not a peep (and continues btw).
If a bank does it, it’s different? What happened to BAC? They should be in a graveyard right now? Bloomberg just had a piece today at how banks made record profits on the bond markets. The 2nd leins, thanks to unicorn accounting practices, allow this shit to continue, who’s going to change that bullshit (FASB 157)?
Let me know when Citizens decide to take matters into their own hands, until then, enjoy being pillaged. The Fed? Let me know when summary executions start for them and all these politicians that enable selling us out to allow this bullshit to continue.
Democrats & Republicans are one-in-the-same, The Fed? What fucking world are they living in? Not one where they have to pay for food and fuel. Sure, CONgress Members may differ on social issues, but they are both part of the looting/absence Rule of Law problem. The Fed just needs this acadamia bullshit shoved back up their ass.
Electioneering indeed.
“the four biggest banks have residential mortgage second liens that based on the most recent data are valued at $369 billion. My understanding is that they are marked at between 80% and 90% of face value (JP Morgan may have written them down a bit more) when second lien paper is trading in the secondary market at 30 cents on the dollar. If you assume an average of 85% of face and it needs to be 30%, that $369 billion is really $130 billion, meaning you'd have a nearly $240 billion hit”
This number is absurd on the face of it. The majority (60%+) of second-liens are HELOCs, the vast majority of which in turn went to people who had either no mortgages or prime mortgages. The delinquency rate on HELOCs as of 3rd quarter 2011 was 6%. Closed-end second liens generally went to people with shakier credit, but they constitute a minority of second-lien loans, and their delinquency rate as of 3rd quarter 2011 was around 12%. There is simply no way you can run those numbers and end up with a valuation of the second-lien holdings of 30% of face value.
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