Banks: After the Stress Tests
Posted by John Steele on May 11, 2009
Last week’s release of the government-
conducted “stress tests”on US banks provided a glimpse of the mountain of debt – and bad debts – accumulated by US capital. And it’s not all from subprime home-buying loans, not by a long shot. Morgan Stanley could face 45% losses in its commercial real estate portfolio; other lending institutions as much as a third, and others could face losses of 10%-20% in their corporate loan portfolios. In credit card losses, the dangers are very widespread, running as high as almost 40%. Overall, according to the scenarios envisioned by these tests, some 9% of all loans might go bad – a figure that is even higher than it was during the depression of the 1930s. And that’s all within the parameters of these tests, which many have found overly loose and forgiving (see below).
Not very reassuring, you’d think, despite Federal Reserve Chairman Bernanke’s statement that “the results released today should provide considerable comfort to investors and the public.” Many analysts were not reassured, noting the many often unrealistic assumptions built into the analysis. In fact, as the following article from the Wall Street Journal makes clear, these assumptions were not the result of analytic judgment, but of a bargaining process with the big banks themselves.
The purpose of the tests, it’s clear, was not so much to test and assess, as to reassure the public, as well as investors and the banks themselves, that the banks are basically OK, so that capital will flow to the banks and the banks themselves will start lending again.
Will this – amounting to a massive public-relations scheme – work? We’ll see.
In the meantime, let’s reflect on the phenomena which this crisis has brought to the surface so vividly: Banks and other institutions whose pursuit of profits to the exclusion of all other considerations has caused a worldwide crisis; a government which sees its chief duty to be the enabling and servicing of private profit as the structuring principle of economic social life; a truly massive use of public funds and promissory notes to underwrite the institutions which have brought on deep social crisis and to convince these same institutions to resume their activities. And it is declared that any other form of social organization is impossible.
Banks Won Concessions on Tests
By David Enrich, Dan Fitzpatrick and Marshall Eckblad
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.The overall reaction to the stress tests, announced Thursday, has been generally positive. But the haggling between the government and the banks shows the sometimes-tense nature of the negotiations that occurred before the final results were made public.
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 Corp., Citigroup Inc. and Wells Fargo & Co. 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.
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.
Bank of America’s final gap was $33.9 billion, down from an earlier estimate of more than $50 billion, according to a person familiar with the negotiations.
A Bank of America spokesman wouldn’t comment on how much the previous gap was reduced, though he said it resulted from an adjustment for first-quarter results and errors made by regulators in their analysis. “It wasn’t lobbying,” he said.
Wells Fargo’s capital hole shrank to $13.7 billion, according to people familiar with the matter. Before adjusting for first-quarter results and other factors, the figure was $17.3 billion, according to a federal document.
“In the end we agreed with the number. We didn’t necessarily like the number,” said Wells Fargo Chief Financial Officer Howard Atkins. He said the company was particularly unhappy with the Fed’s assumptions about Wells Fargo’s revenue outlook.
At Fifth Third Bancorp, the Fed was preparing to tell the Cincinnati-based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion. Fifth Third said the decline stemmed in part from regulators giving it credit for selling a part of a business line.
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. Executives persuaded the Fed to include the future capital-boosting impacts of pending transactions.
SunTrust Banks Inc. also persuaded the Fed to significantly reduce the size of its estimated capital gap to $2.2 billion, after identifying mathematical errors in the Fed’s earlier calculations, according to a person familiar with the matter.
PNC Financial Services Group Inc., saw a capital hole materialize at the last minute. As recently as Wednesday, PNC executives were under the impression they wouldn’t need to find any new capital, according to people familiar with the matter. Thursday morning, the Fed informed PNC that it had a $600 million shortfall.
Regulators said other banks also were told they needed more capital than initially projected.
The Fed’s findings were less severe than some experts had been bracing for. A weeklong rally in bank stocks continued Friday, with the KBW Bank Stocks index surging 10%. Investors were especially relieved by the relatively small capital holes at regional banks. Shares of Fifth Third soared 59%, while Regions Financial Corp.’s $2.5 billion deficit led to a 25% leap in its stock.
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. But if they were too soft, the tests could have lost credibility, defeating their basic confidence-building purpose.
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.
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.
Federal officials said their projections reflected the most comprehensive analysis ever conducted of the industry.
The test results showed that the 19 banks faced a total of $599 billion in losses over the next two years under the government’s worst-case, Depression-like scenario. The Fed directed 10 banks to add a total of nearly $75 billion to their capital buffers to insulate themselves from potential losses.
Banks pressed ahead on Friday with plans to fill their capital holes by tapping public markets. Wells Fargo raised $7.5 billion in stock through a public offering. The bank originally planned to raise $6 billion, but expanded the offering, which was valued at $22 a share, due to robust demand. Shares of Wells Fargo rallied $3.42, or 14% to $28.18.
Morgan Stanley, which is facing a $1.8 billion capital hole, raised $4 billion by selling stock. Shares of Morgan rose $1.06, or 4%, to $28.
Eddy Laing said
There are, of course, multiple fronts to these efforts to massage data and spin the analysis of statistics.
Each capital formation is scrambling for its own competitive advantage against each other, and in that scramble the desperation is growing and framed by forced resignations, bankruptcy filings, forced or hostile takeovers, mergers, etc.
Internationally, the aggregate of US capital — represented in its central bank and treasury which are now the major underwriters of the whole mess — is likewise competing with its peer imperialists to attract more money capital keep itself animated. The US ruling class is attempting to pull itself out of this financial collapse — a collapse of ‘fictitious capital’ credit — by leveraging its current debts to borrow that much more, in what can only be understood as a global Ponzi scheme, selling its debt (treasury bonds) to banks in China and Japan. (oh, really?)
In THIS Ponzi scheme, however, the ultimate marks will not be other East Coast millionaires or investment funds but the masses of exploited (workers, peasants) people in Africa, Asia and Latin America — and now extending into the imperial centers themselves — who are being bled out to feed global capitalism and who will now be subjected to even more economic and political oppression so that capital might revive.
But thirdly, and also importantly, the public spin-mastering that has been going on in the US ‘news’ media since the March mini-collapse — that the stock market has ‘rallied’, that the April added unemployment figures (500,000+) are ‘not as bad as expected’, that Wal-Mart’s sales were ‘better than expected’ and all the other other ‘happy days are here again’ nonsense — is a very concerted effort to redirect public attitudes, to disarm the growing inclinations to critically question the stability of this system (even as that questioning was going off in a dozen different directions, progressive and backward), and certainly to set aside any discussion of programmatic alternatives (employment, health care), including and most especially the systemic alternative to capitalism itself: socialism.
It is increasingly important in this period for us to enter into every opportunity of public discussion and to challenge not just the fraudulence of the state’s accounting practices in this specific instance, but the fraudulence of capital as a historic whole.
Eddy Laing said
and then:
U.S. banking crisis may last until 2013: S&P
Wed May 13, 2009 4:48pm EDT
By Jonathan Stempel
NEW YORK (Reuters) – A day after saying big U.S. banks probably needed to raise only one-fourth the capital demanded by the government, Standard & Poor’s said the nation’s banking crisis has “merely entered a new phase” and might not end before 2013.
The credit rating agency said the industry is being propped up by hundreds of billions of dollars of government support, especially for lenders considered too important to the financial system to fail.
While efforts to spur lending, take bad assets off banks’ balance sheets, and restart the market for packaging and selling securities may help the sector, S&P said banks will have a tough time surviving absent a bigger capital cushion than regulators require.
“There’s nothing to say that this banking crisis can’t go on for another three or four years,” S&P Managing Director Tanya Azarchs said.
S&P did not immediately return a request for comment.
On Tuesday, S&P said major U.S. banks need to raise about $18 billion of capital to protect themselves from the economic downturn, though this amount could grow if conditions worsen.
The amount is well below the $74.6 billion that the government last week ordered 10 of the largest U.S. banks, led by Bank of America Corp and Wells Fargo & Co, to plug potential capital shortfalls.
These 10 banks were among 19 subjected to government “stress tests” to gauge their readiness to withstand a particularly severe recession in 2009 and 2010.
The other nine, including JPMorgan Chase & Co and Goldman Sachs Group Inc, got clean bills of health when stress test results were released on May 7.
S&P on May 4 said it may lower its ratings for 23 U.S. banks and thrifts, including 10 that underwent stress tests, citing concern about the industry’s capitalization.
It said the 23 companies had at least a 50 percent chance of being downgraded within 90 days.