Saturday, May 9, 2009

WSJ: Banks Won Concessions on Tests

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As I stated in my previous piece, only in America do you get to negotiate with your regulator... on a test that "everyone passes" no less. "Look regulator, I don't believe you got it right - here is how we can make it better". It just seems to thrive in this market you have to close your eyes and live in a parallel universe of make believe.

I think when the books are written about this entire era in 4-5 years you will see so much dirt exposed, but by then the "solution" of pumping up every asset class via magic hand waving and disingenuous information (leaked of course) will have "succeeded". And we'll all just chuckle as we look back - Banana Republic style. There are so many earlier injustices that have long been forgotten - such as destroying Chrysler bondholders but never once asking anything of bank bondholders. Such as paying AIG's derivative partners 100 cents on the dollar when in normal bankruptcy like procedures (which AIG would be if not for the US taxpayer) [Oct 17, 2008: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG] - they'd be happy with 20, 30, 40 cents. Such as the tax loophole Hank Paulson threw into TARP at the last minute to allow banks that buy other banks massive windfalls. [Nov 13, 2008: Washington Post - A Quiet Windfall for US Banks] Such as.... ugh... it's all good. The FDIC Troubled Bank List might plummet to zero next quarter... all for a measly $75 billion. Easy as that.

p.s. did anyone in mass financial media even talk about Fannie Mae getting in line for another $19B bailout? We don't even talk about these things anymore.
  • 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. 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. "In the end we agreed with the number. We didn't necessarily like the number," said Wells Fargo Chief Financial Officer Howard Atkins.
  • 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. (magic!)
  • 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. (lol - best negotiators on the Street; huge kudos to the lobbyist and law team at Citi; I expect multi hundred million bonuses paid out to these teams at Citi, of course using our tax money - err, not our tax money since it cannot be proven it's our tax money)
And this just sums it up... as a regulator you DO NOT want to risk angering the firms you are REGULATING. Not in America - home of "free market" capitalism and socialism for the corporation.
  • 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.
Whatever you do, do NOT spook the markets - that would be wrong and take away from the whole point of a "test". The market is a very fragile beast that we do not want to "spook" - we need it to go up, so it "tells" people everything is right in the world. Because the market tells us all we need to know - even if bad tests would "spook it". It now has telegraphed the correct message... good job market. And "regulators".
  • 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.
Mr. Cassidy, put a sock in it... that info is more SPOOKY. We don't do SPOOKY - we do reassuring.

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