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 »
One of the nice things about last year’s Fed bank stress tests was that they were released, and everyone was like “OMG Citi failed!!,” and then we all calmed down and realized that all that meant was that Citi’s capital return plans had failed, so it couldn’t launch a big share buyback, but it wasn’t going to be smashed into dust as a warning to its compatriots. That turned out to be cold comfort for Vikram Pandit but was soothing for the rest of us. This year, in part to avoid the Vikram thing, the rules have changed: today the straight-up stress test results were released, while the Fed will approve or reject capital return proposals next week, and there’ll be a lot of weird disclosure gamesmanship in the interim. Early signs point to Citi being out of the doghouse, and Goldman possibly being in it.
Also Ally Bank failed, sorry! Legit failed, not failed pro forma for capital return. So, smashed into dust.
Here is a chart you may or may not find amusing:
This chart is intended to answer the question: how many a 1-in-100 terrible days would these banks need to have in order to get the Fed’s estimated trading losses?1 Read more »
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 »
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 »
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 »
The Fed plans to notify financial institutions that passed a second round of stress tests that they can begin returning money to their shareholders, an important sign of the banking system’s speedy recovery. Banks are expected to review the Fed’s findings with their boards and could put out a flurry of announcements as early as Friday afternoon detailing their plans. In the first wave, JPMorgan Chase increased its dividend payout to 25 cents a share and announced plans to buy back $15 billion of stock. Wells Fargo said it will pay a special dividend of 7 cents per share and plans to purchase 200 million shares. “It signals the banking industry is back on its feet,” said Jason Goldberg, a banking analyst Barclays Capital. “Once out of the penalty box, we look for the dividend payout ratios and earnings to grow over time.” [Dealbook]
The Church of Federal Reservology today proclaimed all but one of the country’s biggest banks clear of all the engrams caused by the late economic crisis.
It took $77 billion–slightly more than the $74.6 billion the Church predicted–worth of auditing sessions, but nine of the 10 biggest banks waylaid in the subway by Church volunteers for complimentary stress tests, and can now begin working towards Operating Thetan status.
The nine are now ready to handle anything (beneath a 10.3% unemployment rate next year*) with a properly analytic mind.
Read more »
Just in case you had not yet gotten your fill of the Cross Pond Classic, another event is introduced: The 400 meter stress-test hurdles. GO!
Analysts Olivia Frieser and Andrea Cicone concede the test is a “real one”, in so far as the parameters – 12 per cent unemployment, 50 per cent fall in house prices and a six per cent decline in GDP from peak to trough – are reasonably demanding:
The assumptions seem severe enough to us and therefore the stress test seems real…
However, they note:
…if we were picky, we would say that they remain static tests, and that these assumptions are merely in line with the base case of our admittedly bearish economists.
The US and the UK stress tests have two very different objectives [FT Alphaville]
True, we think canned “stress tests” with negotiated findings are a joke. Still, it’s something to tell the neighbors. Neighbors who, in this case, don’t have one to tell back. Might we have a chance to see the effects of different approaches (the all-encompassing Geithner v. The “No Soup For You” Merkel) on financial crisis as the months roll by? Perhaps, if things remain as they are. Europe’s approach has been far different (partly as a consequence of a much less developed federal system) and this makes for interesting comparisons.
The U.S. government’s stress tests are fueling concerns that European banks could be falling behind in their efforts to bolster their own finances.
Unlike in the U.S., there has been no major policy initiative to force banks in Europe to increase capital cushions, and governments have intervened only on a piecemeal basis. Meanwhile, as U.S. banks pile in with efforts to raise capital from investors, European banks aren’t taking advantage of a stock rally to do the same.
“Compared to the U.S., the European banking system is rapidly being left behind,” said Philip Finch, bank analyst at UBS AG. “If anything, the rally that has taken place has allowed complacency to come back at the bank level and at the policy level.”
They don’t call it “The Old World” for nothing.
European Banks Take Stress Hit [The Wall Street Journal]
We loves us some State Street. Thumbing your nose at the Capitalatchiks and their bogus “stress tests” is the quickest way to get on our good side in this day an age. Of course, it won’t last. “Improving capital” is going to come to everyone at one point or another, even if its only after the effect of having all your competition sitting on piles of cheap government
cheesecapital sinks in. Pay no mind to the Frank behind the curtain when you take it though. That is a microphone in his pocket (it is a direct feed into CSPAN and the Congressional Record’s stenographer) and he’s happy to see you. Better start lending to the highest risk voters, and better start now.
State Street Corp. does not need to boost its capital levels as a result of the government’s recently concluded stress tests, according to people familiar with the matter.
A report in Wednesday’s Wall Street Journal said the bank was among those that needed to improve its capital.
As a result of the government’s two-and-a-half-month examination of the U.S.’s 19 largest financial institutions, a number of banks need take no action. In addition to State Street, they include J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and American Express Co.
State Street Doesn’t Need to Boost Capital [The Wall Street Journal]
So remember that totally crazy rumor everyone thought was insane to the effect that pretty much all of the banks (16 of 19) failed the stress tests? Or were “technically insolvent,” whatever that means? That rumor seems to have originated with a April 19th weblog entry from Turner Radio Network listing 7 facts about the stress tests and summarizing with “Put bluntly, the entire US Banking System is in complete and total collapse.” Well, that eventually looked like a total hoax- intended to be outlandish for the shockingly poor results turned in by the banks tested. But apparently the real results aren’t particularly fantastic either. Specifically:
About 10 of the 19 largest U.S. banks being stress tested will be instructed by regulators to raise more capital, according to a source familiar with official talks.
The banks have been negotiating with their regulators about the depth of their capital needs, should the recession prove to be deeper and longer than anticipated. Markets have been anxiously anticipating the results, which will differentiate the strongest banks from those still expected to sustain considerable credit losses.
What could be a more perfect opportunity for the DecaSplit 10 unit splitscreen segment on CNBC? Reuters managed only eight (and since the exact list of the
failuresbanks needing further assistance from various agencies and the gracious demeanor of the American public hasn’t been released yet, these might not even vaguely resemble the real list. Well except for Ken Lewis. And Count Vikula) so CNBC has a huge opening here.
About 10 U.S. stress test banks to need more capital [Reuters]