Banks Throwing Lavish Stress-Test Graduation Parties With Money Carefully Hoarded To Pass Stress Tests

And why not? It’s not like they’ll need those capital buffers anymore, and there’s much to celebrate.
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By AKS.9955 (Own work) [CC BY-SA 4.0], via Wikimedia Commons

By AKS.9955 (Own work) [CC BY-SA 4.0], via Wikimedia Commons

It’s official: The last-ever Federal Reserve stress tests are also the first in which everyone passed, albeit some—we’re looking at you, Capital One, with a quizzical glance in your direction, too, Goldman Sachs—with somewhat less than flying colors. Still, in celebration of the achievement, and to mark the advent of the post-risk, post-regulation world under President Trump (and possibly to buff up J-Yells’ bona fides before begging Gary Cohn not throw her back out into the mean hallways of academia), the Fed was feeling generous, signing off on everyone’s plans to reward their shareholders, even though everyone asked for some pretty rich rewards with some pretty stressful potential consequences.

On average, the group of firms taking part in the stress tests requested payouts that are near 100% of their expected earnings over the next year, up from 65% last year, senior Fed officials said. That means banks in some cases will be able to start whittling away at capital buffers that many bank executives say are well in excess of what is needed to absorb potential losses.

Tossing its dunce cap aside, Citigroup announced its biggest dividend ever, and plans to blow 132% of its earnings this year on more. Not to be outdone, Jamie Dimon & co. boosted their dividend and announced JPMorgan Chase’s biggest stock buyback ever. Morgan Stanley also plans to cut checks to shareholders in excess of what it plans to make this year. Bank of America plans a dividend so big that Warren Buffett may well decide to convert his preferred shares and become the its biggest shareholder. We may not get an Obamacare repeal or tax reform, but at least the banks are getting what they wanted from the Trump presidency.

Such lavish payouts are exactly what investors had been hoping banks would deliver under a Trump presidency. While the administration has no direct role in the stress test, this year is the first that a Republican Fed governor, Jerome H. Powell, has overseen the process….

“After seven years, at some point, you have to get it right,” said David Wright, a managing director in the bank regulatory practice of Deloitte Advisory. “This is quite a victory for the Fed to get everyone close to a perfect score.”

Fed ‘Stress Tests’ Clear All Banks to Issue Payouts to Shareholders [WSJ]
Big Banks Set to Pay Out Largest Dividends in a Decade [DealBook]
Capital One Gets ‘Conditional’ Passing Grade on Fed Stress Test [WSJ]
Citi doubles dividend, bank shares jump after industry passes Fed stress tests [CNBC]
Berkshire Hathaway On Path to Be Top Bank of America Holder [WSJ]

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Citi Will Try The Stress Test Again With A $9bn Stock Buyback

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?**