More stress tests, bleargh. I guess the news is that Citi “failed”, though I can’t get all that excited by that because it didn’t exactly “fail” in the sense of now it’s being forced to raise capital / broken up / burned to the ground. Instead it failed assuming it follows the capital plan it submitted to the Fed, which is clearly a capital-lowering rather than capital-raising plan. I ballpark it at $10bn of share repurchases and dividends,* which is … well, it’s pretty big for Citi. So they can just not do that then. Or not do quite as much of that, which seems to be their plan:
In light of the Federal Reserve’s actions, Citi will submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations. The Federal Reserve advised Citi that it has no objection to our continuing the existing dividend levels on our preferred stock and our common stock, and we plan to do so, subject to approval by the Board of Directors each quarter. The Federal Reserve also advised that it has no objection to Citi redeeming certain series of outstanding trust preferred securities, as Citi proposed in its Capital Plan.
We plan to engage further with the Federal Reserve to understand their new stress loss models. We strongly encourage the public release of these models and the associated benchmarks and assumptions. We believe greater transparency in this process will best serve all banking institutions and their shareholders as well as the international regulatory community and market participants, and will encourage a level playing field globally.
There are at least two ha! moments in that snotty last paragraph. First there’s the fact that the Fed had planned to release the stress test results on Thursday and got gun-jumped by Jamie Dimon. So much for Fed transparency. But also, specifically, as people are all running around suing each other about the Fed maybe kind of encouraging bank CEOs to hide material information from investors, it is odd that the Fed would have the stress test results and sit on them for two days. Imagine the scenario where Jamie Dimon, Vikram Pandit, and the Fed all know that JPM passed and was going to do a largeish buyback, while Citi failed and was going to do a … I guess somewhat smaller buyback – and they didn’t tell anyone from today until Thursday. If you sold JPM to buy C today, wouldn’t you be kind of annoyed?**
But also, shut up Citi. At first glance “greater transparency in this process will best serve all banking institutions and their shareholders as well as the international regulatory community and market participants” sounds inoffensive, but you could also read it as like “greater transparency about Fed methodology will allow us to game the stress tests more precisely.” And what a cynical dick I am for suggesting that, except: Citi failed by 0.1%!*** That doesn’t sound like someone who came to a thoughtful independent balancing of capital costs and risks independent of Fed metrics. It sounds like a bank that tried to optimize the test to get to exactly the 5.0% minimum level, while buying back as much stock / paying as much dividends as possible**** – and came up short by about 10bps. 10bps works out to about $1bn of capital, so just buy back $1bn less stock and you’re good to go, Citi. Transparency problem solved. You’re welcome.
Comprehensive Capital Analysis and Review 2012: Methodology and Results for Stress Scenario Projections [FRB]
Citi (C) Issues Statement on Fed’s Stress Test Results: to Submit New Capital Plan Later This Year [StreetInsider]
Did Jamie Dimon Just Diss the Fed? [NetNet]
* I ballparked it thusly:
The JPM number is smaller than their $15bn authorization (plus like a yard and a half of div increases between now and Q4 2013) but the right zip code, they don’t have to use the whole authorization, it’s over time, etc. etc. whatever.
** Who would you sue? What are the chances that Vikram Pandit would discuss his stress-test stress at an AA meeting? So many questions that will never be answered.
*** Or less. The Fed charts only go out to one decimal place. Maybe they failed the stress test by like twenty bucks.
**** Btw, I have no problem with that. These numbers are sort of arbitrary so why not game them, whatever. It’s just that it’s poor form to get your gaming wrong and then complain about a lack of transparency. It’s not supposed to be easy to game capital requirements! You’re just supposed to be good at it!