Banks Won Concessions on Stress Test

As I stated in my previous piece, only in America do you get to negotiate with your regulator... on a test that "everyone passes" no less. "Look regulator, I don't believe you got it right - here is how we can make it better". It just seems to thrive in this market you have to close your eyes and live in a parallel universe of make believe.

I think when the books are written about this entire era in 4-5 years you will see so much dirt exposed, but by then the "solution" of pumping up every asset class via magic hand waving and disingenuous information (leaked of course) will have "succeeded". And we'll all just chuckle as we look back - Banana Republic style.

There are so many earlier injustices that have long been forgotten - such as destroying Chrysler bondholders but never once asking anything of bank bondholders. Such as paying AIG's derivative partners 100 cents on the dollar when in normal bankruptcy like procedures (which AIG would be if not for the US taxpayer) [Oct 17, 2008: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG] - they'd be happy with 20, 30, 40 cents. Such as the tax loophole Hank Paulson threw into TARP at the last minute to allow banks that buy other banks massive windfalls. [Nov 13, 2008: Washington Post - A Quiet Windfall for US Banks] Such as.... ugh... it's all good. The FDIC Troubled Bank List might plummet to zero next quarter... all for a measly $75 billion. Easy as that.

p.s. did anyone in mass financial media even talk about Fannie Mae getting in line for another $19B bailout? We don't even talk about these things anymore.

• The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining. In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits. Government officials defended their handling of the stress tests, saying they were responsive to industry feedback while maintaining the tests' rigor.
• When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of America (BAC) Corp., Citigroup (C) Inc. and Wells Fargo & Co. (WFC) were furious with what they viewed as the Fed's exaggerated capital holes. A senior executive at one bank fumed that the Fed's initial estimate was "mind-numbingly" large. Bank of America was "shocked" when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations.
• At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks' ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions.
• At times, frustrations boiled over. Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as "asinine," were particularly heated, according to people familiar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed's findings. "In the end we agreed with the number. We didn't necessarily like the number," said Wells Fargo Chief Financial Officer Howard Atkins.
• The Fed ultimately accepted some of the banks' pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter. (magic!)
• Citigroup's capital shortfall was initially pegged at roughly $35 billion, according to people familiar with the matter. The ultimate number was $5.5 billion. (lol - best negotiators on the Street; huge kudos to the lobbyist and law team at Citi; I expect multi hundred million bonuses paid out to these teams at Citi, of course using our tax money - err, not our tax money since it cannot be proven it's our tax money)

And this just sums it up... as a regulator you DO NOT want to risk angering the firms you are REGULATING. Not in America - home of "free market" capitalism and socialism for the corporation.

• With the stress tests, government officials were walking a fine line. If the regulators were too tough on banks, they risked angering their constituents and spooking markets.

Whatever you do, do NOT spook the markets - that would be wrong and take away from the whole point of a "test". The market is a very fragile beast that we do not want to "spook" - we need it to go up, so it "tells" people everything is right in the world. Because the market tells us all we need to know - even if bad tests would "spook it". It now has telegraphed the correct message... good job market. And "regulators".

• 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.

Mr. Cassidy, put a sock in it... that info is more spooky. We don't do spooky- we do reassuring.

Comments

[Market Sniper:]

ALL spin, buddy! Without FASB 157 marked to myth, this comedy would have been over. Notice the timing of the change on that? Coinky-dink? NOT. I want marked to myth in my trading account as well!

May 11 04:15 PM

[Roger Knights:]

I guess the banks figure they've got six months of flying on fumes until their checks bounce--and that's manaña, so why get stressed about it?

Manaña republic--that's us.

May 11 06:37 PM

[dcb:]

You know mark. you may be in danger of getting a lot of neg. comments with this type of post. we have entered the prozac zone. where everyone is happy, there is nothing wrong, and our government is always doing the right thing for us. It is also funny that the attacks you get offer no data to support a counter argument. just name calling and shouting down. but the proof is that the markets are going up so everything must be working. never mind the fact they are being manipulated like crazy. it is orwell from 1984. I used to think the spin and power grabs during he bush years were bad. Little did I think when i voted for Obama I was moving up from the apprentice to the master manipulator. It's like comparing Luke to Yoda. If we just believe in the force all will be right.

May 11 08:46 PM

[dcb:]

Look the stocks I have in my portfolio are still worth what they were during the peak. it's just market dysfunction that they are selling for less. Therefore, you'll lend me money against that value right!!!

May 11 08:49 PM

[Speedspirit:]

Ohhhh Cetinnnn where are youuuuu.

How about puttin your money where your mouth is

Give me a trade of the week and lets see if your right.

May 11 09:09 PM

[short WFC:]

i clearly remember bernake et al talking about 'building confidence' . that was jarring enough that they would openly talk about manipulatng pubic opinion rather than fixing economic fundamentals,

right after that they come up with 'stress tests'. to understand these complex activities one must always ask what is the interests of the parties

stress tests results were negotiated between the gov whose stated interests are 'building confidence' and banks whos stated interests are ..well ..sure seems like bone headed status quo , bonuses, and continued clueless mingling of 'utilitily' banking (managing mom and pop accounts) with investment banking.

so these stress tests are to be believable? that requires stunning gullibility, its infuriating that this is what our leaders expect of us and frightening to see it happening.

still fresh destruction of financial 'services' industry and fed balance sheet dont seem to inspire our leaders to action other than shallow opinion 'fixes' . reminds you of anything? historical examples abound. nero playing the fiddle while rome burnt or the rearrangment of chairs on the titanic..where meaningful activities can fix these fundamental problems?

we need to separate the invetment banks from utility banking and we need true transparency of present banking insolvency. once the gov owned ones open up, other will have a choice to open up or risk losing customers. however bad it is, there may still be enough money and time to fix it.

not for long. one more round of these escalating bank failure cycles and its truly all over. next year there will be as many ARM defaults as they were subprime. good luck coming up with any bailout money for that

meaningful stress tests may have been obtained if the books and the crtieria were discussed openly and testers interests were clearly aligned with economic and banking priciples.

any exposed problems would have laid baseline confidence level going fwd.

pls tell me why i'm totally wrong...

May 12 11:31 AM

[SeeTheLight:]

What is that old saying about the cure being worse than the sickness?
How do we fix the house of cards that fell apart last year? Why of course, with a new house of cards. And then we all sit back enjoy the ride until the next blowout and then fall off the cliff once more. Wash, rinse, repeat. Get your trailing stops in now fellas, if you haven't already done so. Buy some puts, and perhaps even gold is looking a little more shiny these days. Just remember the bigger (of a fantasy) they are, the harder they fall.

May 13 03:20 AM