Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. 'Geithner' on SNLNice critique of the stress tests, and of both Geithner and the 19 banks that took it, in this past Saturday's SNL opener; recounted by Sudeep Reddy at the WSJ's Real Time Economics blog:Saturday Night Live opened with Geithner (played by Will Forte) sitting behind his desk reviewing banks' submissions for "Part 2″ of the stress tests—a written exam taken by all 19 bank CEOs. He explains that Treasury initially planned to give each bank a grade of 1 to 100. "But then we decided that that might unfairly stigmatize banks who scored low on the tests because they followed reckless lending practices, or were otherwise not good at banking.' They changed to a simple pass/fail system, then to a pass/pass*—"this seemed less judgmental and more inclusive.' "Eventually, at the banks' suggestion, we dropped the asterisk and went with a pass/pass system. Tonight, I am proud to say that after the written tests were examined, every one of the 19 banks scored a pass. Congratulations, banks.' He explains that none of the banks answered all 50 questions correctly, and most got less than half right. "One bank in particular—Citigroup—seemed to think the whole thing was just a big joke.' On screen we see its answers to questions 13 through 15: "Geithner Sucks!' "I was deeply disappointed with Citigroup's attitude towards this entire project,' the Treasury secretary explains. "Frankly, if Citigroup weren't too big to fail, I would've failed them. That's how disgusted I was.' Among the other questions and answers: * Number 11: For every 10 million in commercial loans outstanding, a bank should have … "The answer we were looking for was 10% cash on hand.' J.P. Morgan Chase wrote: Knicks Tickets Wells Fargo wrote: Gulfstream jet Citigroup wrote: Geithner Sucks! * Number 23: If federal bank examiners determine your bank to be under-capitalized, the bank's board of directors should … Goldman Sachs wrote: Flee the Country State Street of Boston said: Shred documents Capital One said: Eliminate eyewitnesses The Geithner stand-in explains, "GMAC apparently answered ‘taxpayer bailout' to every one of the 50 questions. Although that did turn out to be the right answer to 30 of them.' Labels: bank stress testing, Citigroup, SNL, stress tests, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Banks Won Concessions on Stress Tests (WSJ)Fed Cut Billions Off Some Initial Capital-Shortfall Estimates; Tempers Flareat Wells By DAVID ENRICH, DAN FITZPATRICK and MARSHALL ECKBLAD Wall Street Journal | May 9 2009 The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining. In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits. The overall reaction to the stress tests, announced Thursday, has been generally positive. But the haggling between the government and the banks shows the sometimes-tense nature of the negotiations that occurred before the final results were made public. Government officials defended their handling of the stress tests, saying they were responsive to industry feedback while maintaining the tests' rigor. When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed's exaggerated capital holes. A senior executive at one bank fumed that the Fed's initial estimate was "mind-numbingly" large. Bank of America was "shocked" when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations. At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks' ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions. At times, frustrations boiled over. Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as "asinine," were particularly heated, according to people familiar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed's findings. The Fed ultimately accepted some of the banks' pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter. Bank of America's final gap was $33.9 billion, down from an earlier estimate of more than $50 billion, according to a person familiar with the negotiations. A Bank of America spokesman wouldn't comment on how much the previous gap was reduced, though he said it resulted from an adjustment for first-quarter results and errors made by regulators in their analysis. "It wasn't lobbying," he said. Wells Fargo's capital hole shrank to $13.7 billion, according to people familiar with the matter. Before adjusting for first-quarter results and other factors, the figure was $17.3 billion, according to a federal document. "In the end we agreed with the number. We didn't necessarily like the number," said Wells Fargo Chief Financial Officer Howard Atkins. He said the company was particularly unhappy with the Fed's assumptions about Wells Fargo's revenue outlook. At Fifth Third Bancorp, the Fed was preparing to tell the Cincinnati-based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion. Fifth Third said the decline stemmed in part from regulators giving it credit for selling a part of a business line. Citigroup's capital shortfall was initially pegged at roughly $35 billion, according to people familiar with the matter. The ultimate number was $5.5 billion. Executives persuaded the Fed to include the future capital-boosting impacts of pending transactions. SunTrust Banks Inc. also persuaded the Fed to significantly reduce the size of its estimated capital gap to $2.2 billion, after identifying mathematical errors in the Fed's earlier calculations, according to a person familiar with the matter. PNC Financial Services Group Inc., saw a capital hole materialize at the last minute. As recently as Wednesday, PNC executives were under the impression they wouldn't need to find any new capital, according to people familiar with the matter. Thursday morning, the Fed informed PNC that it had a $600 million shortfall. Regulators said other banks also were told they needed more capital than initially projected. The Fed's findings were less severe than some experts had been bracing for. A weeklong rally in bank stocks continued Friday, with the KBW Bank Stocks index surging 10%. Investors were especially relieved by the relatively small capital holes at regional banks. Shares of Fifth Third soared 59%, while Regions Financial Corp.'s $2.5 billion deficit led to a 25% leap in its stock. With the stress tests, government officials were walking a fine line. If the regulators were too tough on banks, they risked angering their constituents and spooking markets. But if they were too soft, the tests could have lost credibility, defeating their basic confidence-building purpose. All the back-and-forth is typical of the way regulators traditionally wrap up their examinations of banks: Regulators often present preliminary findings to lenders and then give them time to respond. The process can result in changes to the regulators' initial conclusions. Some of the stress-test revisions, for instance, were made to account for the beneficial impact of the industry's strong first-quarter profits. On Friday, some analysts questioned the yardstick, known as Tier 1 common capital, that regulators chose to assess capital levels. Many experts had assumed the Fed would use a better-known metric called tangible common equity. According to Gerard Cassidy, an analyst with RBC Capital Markets, the 19 banks' cumulative shortfall would have been more than $68 billion deeper if the government had used the latter metric, which accounts for unrealized losses. Federal officials said their projections reflected the most comprehensive analysis ever conducted of the industry. The test results showed that the 19 banks faced a total of $599 billion in losses over the next two years under the government's worst-case, Depression-like scenario. The Fed directed 10 banks to add a total of nearly $75 billion to their capital buffers to insulate themselves from potential losses. Banks pressed ahead on Friday with plans to fill their capital holes by tapping public markets. Wells Fargo raised $7.5 billion in stock through a public offering. The bank originally planned to raise $6 billion, but expanded the offering, which was valued at $22 a share, due to robust demand. Shares of Wells Fargo rallied $3.42, or 14% to $28.18. Morgan Stanley, which is facing a $1.8 billion capital hole, raised $4 billion by selling stock. Shares of Morgan rose $1.06, or 4%, to $28.20. Labels: Bank of America, bank stress testing, Wells Fargo Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Biggest Banks Need $75 Billion MoreThe results of the "stress tests" are in.According to the results, the biggest banks need $75 billion in additional capital to ride out a "prolonged downturn" (as opposed to whatever it was we've just been through and all the money we've loaned out). The Washington Post has a handy chart here. The biggest potential losers are Bank of America, Wells Fargo, and GMAC. However, according to former banking regulator and S&L scandal prosecutor William Black, the tests are a "complete sham" that don't go nearly far enough. If they really tested banks properly they would show a collective hole of $2 Trillion (yes, capital "t"), and force banks to massively increase their capitalization rates. Read the article here and the interview here, as well as Black's amazing article for D&S way back from 2007. --d.f. Labels: bank stress testing, banking crisis, banking system, Daniel Fireside, stress tests, William Black, William K. Black Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Stress Test HaikuHat-tip to Kiaran H. for passing this along:The stress tests are doneIt originally appeared on Jon Talbot's blog at the Seattle Times, in a thoughtful post about recent layoffs at Microsoft. Here is one of the parts that was thoughtful: The media do the public a disservice by continually looking for "good news" of a turnaround. Let me explain: This historic recession was years, even decades, in the making. Behind it are deep structural problems that can't be quickly addressed. The green-shoot watch distracts from a clear-eyed view of our situation and discussion of the reforms needed. It also continues the salesmanship seen in some of the financial media (CNBC, call your office) that enabled the disaster. I also like his comment about the CEO signing emails about layoffs simply, "Steve": "You gotta love CEO Steve Ballmer signing his layoff email to employees, 'Steve.' Just good ole Steve. Such is 'business casual'—we're all on first-name basis. Except one signs the checks and pink slips." On the topic of "green shoots," the blogger at Corrente had this gentle critique of the haiku: "I thought haiku was supposed to be seasonal. So what about those green shoots?" Corrente readers were up for the challenge; here's my favorite (partly because of its relevance to this D&S article): spring rain on green shootsThe colleague of Kiaran's who sent her the haiku thought it was from Calculated Risk blog. It was not, but they did have part of a series of haikus on bank failures: From the FDIC: FirstBank Financial Services, McDonough, GAD&S blog readers should post their own left economics haikus in the comments section; maybe we'll print them in our new "$.02" reader contributions department of the magazine.Georgia on my mind... —CS Labels: bank failures, bank stress testing, Calculated Risk, Corrente, Jon Talbot Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Citibank and Bank of America Fail Stress TestsSix of the nation's 19 largest banks have failed the Federal Reserve's "Stress Tests," including Citibank and Bank of America, according to Bloomberg.The Fed is pushing the banks to raise capital by converting preferred shares (including those held by the Treasury) into common shares, rather than seeking more federal funds. Labels: Bank of America, bank stress testing, Citibank, Federal Reserve, stress tests Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Julian Delasantellis on Stress TestingThe witty Delasantellis offers his thoughts. Nice to read in conjuction with our post on Bill Black today:Perhaps a cool hand by Julian Delasantellis Asia Times February 17th, 2008 It wasn't the planet-killing asteroid from 1998's Armageddon that you heard slamming into Earth with a deafening thud last week, but the consequences of what it was may be just about as serious. It was but the latest attempt, the Treasury Secretary Tim Geithner plan, to pull the US financial system out of the deep hole it so aggressively and enthusiastically threw itself into during the great credit boom early in this decade. How bad was it? Well, as Wall Street secretary pretending to be investment banker Tess McGill (Melanie Griffith), in 1988's Working Girl, observed on her attempt to pitch a corporate buyout seemingly going badly, "They don't exactly have bouncers atthese things, they're a little more subtle than that." Geithner should be thankful for that as well. If not, he would have been grabbed by his collar and thrown out into the gutter on Pennsylvania Avenue, beneath the statue of Alexander Hamilton, his country's first Treasury secretary, realizing that, on the basis of the tax problems and this dubious financial system rescue plan that have essentially become the coming-out party for the Treasury debutante, he has a long way to go to even match up to the standards of Ogden Livingston Mills, Herbert Hoover's second Treasury secretary, let alone the giants in the office such as Hamilton. The basic complaint about the Geithner plan was that it was vague. At a time as dire as this, the press, and, it turns out, the markets, with the Dow Jones Industrial Average dropping over 350 points just as Geithner was speaking, wanted something a bit more substantial than just the Treasury secretary playing coy and batting his baby-blue eyes before the entire world. Read the rest of the article Labels: bailout, bank failures, bank stress testing, banking regulation, banking system, financial crisis, Julian delasantellis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
