As I alluded to in a previous column, discerning minds should be paying close attention to the repayment of TARP funds. Additional information since then has come to light in the bank repayment of taxpayer money.
Yesterday Bloomberg reported (JP Morgan, Morgan Stanley Among 10 Banks Repaying TARP Funds):
“These repayments are an encouraging sign of financial repair,” Treasury Secretary Timothy Geithner said in a statement today. “But we still have work to do.”
The decision reflects rising pressure from banks to free themselves of government stakes that left them vulnerable to political interference, following a popular outcry against Wall Street bailouts.
The Treasury didn’t name the banks. In addition to JPMorgan and Morgan Stanley, American Express Co., Bank of New York Mellon Corp., BB&T Corp., Capital One Financial Corp., Northern Trust Corp., State Street Corp. and U.S. Bancorp all said today they are repaying the funds. A spokesman for Goldman Sachs Group Inc., which has demonstrated it can raise funds without federal aid, didn’t return a call seeking comment.
“They’re in some ways picking winners and losers,” said Jennifer Thompson, an analyst at Portales Partners LLC in New York. “There might initially be somewhat of a cloud lifted off the banks that are able to repay TARP.”
A couple of points on this; first off, by what criterion are these banks being allowed to repay TARP monies? This is apparently a good question to be asking, as the Congressional Oversight Panel (ironically “COP”) is calling for a re-run of the now infamous “Stress Tests.”
In its latest report to lawmakers, the Congressional Oversight Panel pointed to the unemployment report for the month of May as a sign that the stress tests were not stressful enough. Even as the pace of job losses slowed during the month, the unemployment rate surged to a 26-year high of 9.4%. Banking regulators that devised the stress tests had said in their most "adverse" case scenario that the jobless rate would hit 8.9% in 2009."The employment numbers for 2009 have already exceeded the harshest scenario considered so far, suggesting that the stress tests should be repeated," the report said.
It seems that Congress has finally realized what I wrote about last month in “Stressed Out”; that the test was useless. At that time I wrote:
The only way the stress test assumptions hold any weight is if the government is correctly calling this (as in right now) the economic bottom. If it is not the bottom, the stress test is utterly useless because it has not considered things getting any worse than they are today. However, what they have done (inadvertently) is finally shown us how weak our banks actually are as of the date the tests were run.
Does Congress now see this? I hope that they do and that they run more stress tests using much more adverse scenarios. If any of them are reading this; try using a scenario that includes “official” unemployment (U3) between 15% and 20% for a worst case scenario. Also consider moving the end of the Great Recession to 2012 or beyond. Heck if we’re going to run a stress test it might as well be stressful right? (No, 15% or 2012 is not out of the realm of possibility.)
The second thing to consider regarding the story about banks paying back TARP is that Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), and Bank of America (NYSE:BAC) are still broke. When I wrote “Wells Fargo Is Broke” I gave you the reasons why I felt that Wells Fargo was improperly assessing its financial condition. On that, look to what I wrote May 11th, 2009:
As of today, Howard Atkins, Wells Fargo's CFO says that the bank "Thinks it already has a lot of capital." This statement, in and of itself, is oxymoronic when one considers the stress test assumptions. Mr. Atkins: What does "a lot" mean to you? I'll tell you what it means to me, "a lot" means Wells does not have enough capital. How do I know this? I know this because the entity that wants to prove Wells has enough capital worse than anyone else, the Federal government, says they need roughly $14 Billion more dollars. I also know this because no bank, including Wells, is likely to repeat their stellar first quarter profits through the remainder of the year to fill any "Gap". But most importantly I know this because the stress test assumptions were anything but stressful and Wells has proven an inability to forecast in the past.
On June 8th, Wells Fargo, along with the rest of the banks who failed the stress test, will present their long term viability plans to the government. On that day they will no doubt continue to state that they will come up with an additional $13.7 billion through earnings. When they say this don't believe it. Neither Wells, nor the Government, has been able to "anticipate the worst" in the past and this time around will be no exception.
So after re-reading that should you really be surprised to hear (from the Bloomberg article above):
The approved firms didn’t include Bank of America Corp., the biggest U.S. bank by assets, and Citigroup Inc., each of which have accepted $45 billion from the government. Wells Fargo & Co., the nation’s largest mortgage lender and the recipient of $25 billion in government aid, also wasn’t on the list.
I think not.
Ladies and gentlemen, our banks have no clothes. The COP is now telling us this bluntly, but only if we are willing to listen. The stress tests proved that our banks were weak using a worst case scenario that has now passed us by. Furthermore, the original stress test did not take into consideration the impending mortgage meltdown and commercial real estate implosion that is likely to come.
Wells Fargo, Bank of America, and Citigroup are all broke, and the others, while better capitalized, are still operating in a fantasy land. The day of financial reckoning is nearly upon our banks; it would be wise to pay attention to the facts. If ever there was a time to start considering this bull market rally over, that moment, if not already here, is rapidly approaching.
Disclosure: No positions in any financial stocks, banks or U.S. equities.