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. Continue reading »
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.
Continue reading »
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]
Well, looks like stress tests have some fans after all. Short sellers. Are we the only ones amused that the unintended consequences of inflicting stress tests on banks include a big spike in the administration’s second most hated side-effect of financial markets- short selling? (The first is when Volcker calls fifteen times in a row and won’t just leave a voice message).
The number of Citigroup Inc. shares borrowed and sold short increased sixfold since Feb. 27, the day the U.S. Treasury announced it would convert some of its preferred shares in the New York-based bank into common stock.
Short interest in Bank of America Corp., MetLife Inc. and American Express Co. climbed more than 40 percent in the same period, according to data compiled by Bloomberg. In total, short sales of the 18 publicly traded financial companies undergoing government stress tests were twice as high on April 15 as they were at their peak last year in July, two months before Lehman Brothers Holdings Inc. collapsed.
Do we have to remind the banks in the room that a steady regimen of diet, exercise and short selling will shed pounds (or dollars) off those balance sheets quite quickly?
Short Selling of Banks Accelerates as New Financial Stress Test [Bloomberg]
