Tags: Banks, capital, capital plans, Federal Reserve, stress tests
Today the Fed released a paper making fun of banks for their lame responses to the Fed’s stress tests, both on prudential-regulatory and on literary grounds. For instance, the banks were supposed to come up with their own stress scenario and see how they’d do in that scenario, and a lot of banks apparently phoned in that effort. The Fed was unimpressed:
A BHC [bank holding company] stress scenario that simply features a generic weakening of macroeconomic conditions similar in magnitude to the supervisory severely adverse scenario does not meet [the Fed's] expectations.
BHCs with stronger scenario-design practices clearly and creatively tailored their BHC stress scenarios to their unique business-model features, emphasizing important sources of risk not captured in the supervisory severely adverse scenario. Examples of such risks observed in practice included a significant counterparty default; a natural disaster or other operational-risk event; and a more acute stress on a particular region, industry, and/or asset class as compared to the stress applied to general macroeconomic conditions in the supervisory adverse and severely adverse scenarios.
At the same time, BHC stress scenarios should not feature assumptions that specifically benefit the BHC. For example, some BHCs with weaker scenario-design practices assumed that they would be viewed as strong compared to their competitors in a stress scenario and would therefore experience increased market share.
Oh sure you get points for, I don’t know, having a lot of capital or whatever the ultimate point of all of this is, but what really distinguishes a B+ from an A bank, stress-test-wise, is creative scenario design. Read more »
Tags: A trick is something a whore does for money, illusion, stress tests
The potentially delusional Europeans are setting an “illusionary” timetable for what may be magical tests based on comically enormous spreadsheets that may or may not accurately reflect anything. Read more »
Tags: Goldman Sachs, stress tests, warrants, Warren Buffett
Derivatives are confusing, even pretty simple ones, which is why Goldman Sachs can describe Warren Buffett’s sale of $5 billion of GS stock like this:
The Goldman Sachs Group, Inc. today announced that it has amended its warrant agreement with Berkshire Hathaway Inc., and certain of its subsidiaries (collectively, Berkshire Hathaway) from cash settlement1 to net share settlement.
“We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago,” said Warren Buffett, Chairman and Chief Executive Officer of Berkshire Hathaway. “I have been privileged to have known and admired Goldman’s executive leadership team since my first meeting with Sidney Weinberg in 1940.”
“We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer of Goldman Sachs.
In September 2008, Buffett bought – among other things – warrants to buy 43.5mm shares of Goldman Sachs stock in October 2013 for $115 a share, for a total purchase price of $5 billion. Today he amended that to instead allow him to buy in October 2013, for a total purchase price of zero, a number of Goldman Sachs shares equal to (A) 43.5 million times (B) [the average trading price of those shares at the end of September 2013 minus $115] divided by (C) that average trading price. As of when I type this, at a price of $145.80, that works out to around 9.2 million shares. So one way to read today’s agreement is that in effect Buffett is selling back 34 million (give or take) shares to Goldman for $5 billion. Read more »
Tags: Banks, capital, Goldman Sachs, research, stress tests
On Monday, as a bevy of banks were settling a zillion dollars of mortgage lawsuits and putting themselves on a path to (1) certainty and (2) giving money back to shareholders, Goldman released a research note with the results of a survey of investors’ expectations of bank capital return.1 Here is what some sample of investors expect:
Total payouts are expected to increase to an average of 58% post-CCAR/CapPR from 43% in 2012. … The survey results suggest the biggest increases in dividend payout ratios will be for Citi and Capital One, while PNC and Morgan Stanley are unlikely to meaningfully move higher. For buybacks, investors expect the biggest increase for BB&T and JP Morgan (vs. their actual buyback, not vs. 2012 approval levels), while there is little change expected for Morgan Stanley, Bank of New York and Northern Trust. … Many of the banks with the most variability of responses are those that are coming off subdued capital deployment levels in 2012, including Capital One, Bank of America, Citigroup and Regions. Given the lack of consensus, it seems that regardless of the announcement, the market is likely to be “surprised”.
I too prefer to order my life so that I’m surprised by everything.2
Anyway the interesting/disappointing part for me is what investors thought about what GS calls the “Mulligan rule.” This refers to the fact that, in the 2012 bank stress tests, banks asked regulators for approval to return an amount of capital, and if the regulators said no then the banks basically couldn’t do anything (ex regular dividends etc.) for another year, but in the 2013 tests if the regulators say no the banks can go back and ask once more for another, lower amount of capital return. I was pretty bullish on this: the do-over gives you a chance to be more aggressive once, and scale back if regulators say no, so you’d think that at least some banks would be aggressive and get away with it, while others will be too aggressive and have to cut back to a more moderate capital return but still no harm no foul. Or so I would think. I am in the minority:
And here, conveniently, is why banks wouldn’t be aggressive – because their own shareholders would get mad at them for being too aggressive: Read more »
Tags: Citi, Fed, stress tests, Vikram Pandit
My simple model of How To Be A Bank goes something like (1) amass assets that are numerous and volatile enough to make your management rich and happy and (2) give as much money back to shareholders as you can, consistent with (1). If that were your model and you were building your capital plan what feelings would you feel about this:
The Federal Reserve on Friday kicked off the next round of its annual “stress test” for big banks, releasing instructions on how the process will work.
Included is a new opportunity for banks to alter their proposals to pay dividends or buyback shares before the Fed decides to approve or reject their overall capital plans. … Under the new instructions, banks will have “one opportunity to make a downward adjustment to their planned capital distributions from their initial submissions” before the final decision to accept or reject a bank’s capital plan is made, the Fed said.
I propose a strategy that goes like:
- take your best guess at how much capital you’ll be allowed to distribute, call it $X;
- submit a plan to distribute $2X;
This appears to be a reaction to the sad fate of Citigroup in the last stress test. Read more »
Tags: Banks, Citi, Fed, stress tests
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?** Read more »
Tags: Jefferies, MF Global, stress tests
There’s that famous line that “Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.” It is sort of inspiring to see Jefferies refute that with a combination of (1) pretty good arguments and (2) still existing. At the core of their argument is, basically, “we are not as reliant on fickle overnight funding as you think.” From their letter to clients, shareholders, friends, Sean Egan, etc.:
To be clear at the outset, we do not use or rely on “wholesale funding,” a catch-all term typically used to refer to funding other than core deposits, such as brokered deposits, foreign deposits or commercial paper. We do not have any unsecured overnight borrowings ….
We finance a portion of our long inventory and cover some of our short inventory by pledging and borrowing securities in the form of repurchase or reverse repurchase agreements, respectively. About 87% of all our repo activities use collateral (or inventory) that is eligible for repo transactions with clearing utilities. … Put differently, 87% of our repos end up with clearing utility counterparties who are blind to the Jefferies’ name in the same way that we are blind to their names. … The remaining 13% of our repo activity is currently contracted for a term that, on average, exceeds 80 days. …
Finally, at any time we are concerned about our inventory funding rollover, we obviously have the alternative of reducing inventory through sales in the market. Given the mix of inventory we carry, this is a straightforward exercise, as evidenced by the actions we took two weeks ago and since then in respect of our European sovereign inventory book.
What I take away from that is:
(1) If you believe it, then you should probably feel okay facing JEF on its funding trades, but
(2) if you believe it, then it doesn’t really matter: JEF just isn’t particularly at the mercy of whimsical short-term funding. Read more »