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Goldman Ran Its Own Stress Tests On Its Mortgages And They Did Great

The Elect have their own special math and don't know what the Fed is talking about.
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Goldman Sachs has spent more than $4.5 billion buying up bum mortgages over the past couple of years. It is not doing so because it wants to, but because it has to: Under the terms of its mortgage settlement last year, it must provide $1.8 billion in relief to consumers. But Goldman doesn’t write any mortgages, and so it has to provide that relief to other people’s consumers by buying their mortgages.


This is all a very long way of saying that Goldman’s got a sizeable delinquent mortgage portfolio right now, and those are the kinds of things that the Fed looks at in a stress test, because if the shit really hits the fan, first-lien mortgages are likely to be a pretty significant money-losing proposition for the banks that hold them. For the most part, the banks did pretty well: BofA, HSBC, Morgan Stanley and Wells Fargo are all in line to suffer losses of less than 2% in a “severely adverse scenario.” Others are a bit more exposed: The House of Corbat might get dinged for 2.5%; BBVA, BMO, Fifth Third and KeyCorp a looking at 3%. That realest of real banks, M&T, would be looking at losses in excess of 4%, but you’d expect that from a bank that just does bank-y things like writing mortgages without any of the frou-frou trading nonsense.

And then there’s Goldman Sachs: The Fed says Goldman’s brand-new garbage mortgage-book losses would be 52.3%. 52.3%! Almost 24 times the median loss rate! That’s some real Old Testament suffering visited upon God’s anointed financiers.

Or is it?

Goldman released its own projections Friday of how it would fare in a downturn scenario. It’s projected losses on first-lien U.S. mortgages: 0%.

Neither Goldman or the Fed explained how it came up with its figure….

Goldman says its own estimates exclude loans that it accounts for using the “fair-value” method, which reflects the price they would fetch in the market.

Since Goldman bought many of these loans at steep discounts at government auctions, it’s possible the bank could sell them at a profit but at a price below the bond’s original face value.

Goldman’s Mortgage-Buying Binge Did Not Go Unnoticed by the Fed [WSJ]


By Ryan McGilchrist [CC BY-SA 2.0 ], via Wikimedia Commons

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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?**