The Fed released the results of their latest, greatest version of a bank stress test yesterday and the biggest surprise was the entertainment value.
The test consisted of projecting 19 financial institutions' ability to withstand a Depression-type scenario of a 21% drop in housing, 50% decline in stocks, and an unemployment rate of 13%. Only those banks showing greater than 5% Tier 1 common capital ratio (High quality capital versus risk weighted assets) were given an unqualified passing grade. Passing marks mean a bank could start giving cash back to shareholders in the form of dividends and share buybacks.
Still with me? Good because this is where it gets fun.
The results of the Fed's third round of stress tests since 2009 were scheduled for release on Thursday after the market close.
However, 56 minutes before of the close of trading yesterday JPMorgan (JPM) announced they had passed the test. Not only that, but the company launched a buyback plan of up to $15 billion of common stock and a 20% hike in their dividend. JPM's release came 2 days and 56 minutes prior to what the Fed had originally planned.
Forced to unveil their own scores after the close of trading, Citigroup (C) confessed to being part of the group of 4 banks failing the test, thus preventing the bank from increasing dividends or instituting buybacks. Citi says they will take the test again, blaming their failure on the vagaries of the exam. They most likely have a point, having missed the 5% hurdle by 0.1%. Regardless, failing is failing.
Citi and JPM are a study in contrasts. JPM is run by Jamie Dimon, the most vociferous of critic of the regulations put in place in the wake of the financial meltdown. Dimon has blamed the regulations as direct obstacles to financial recovery. In so doing he's unflinchingly called out any and all government officials, reserving special vitriol for the Fed Chairman Ben Bernanke.
Dimon also confronted Bernanke directly, telling him ""All of the new capital requirements and regulatory uncertainty has everyone grasping onto their cash/cash-equivalents such as short-dated Treasuries."
In contrast Citi was the bank receiving the most direct aid from the government, largely surviving only thanks to the U.S. covering the bank's massive debts and investing some $30-billion in common and preferred stock. The government has booked some gains on the trade but is still very much involved with Citigroup.
As recently as January, Citi CEO Vikram Pandit told investors "This will be the year that we start returning to capital to shareholders." He'll probably be right at some point, but it won't be today.
Which brings us back to Jamie Dimon's gleeful knife twisting. JPM says it was only a "misunderstanding" that caused the early release of the results. You can almost hear the smirk on the face of whoever penned the announcement.
Unlike the test itself, there was nothing subtle or flawed about the manner in which Dimon and JPM stuck a thumb in the eye of the Fed and administration. Dimon may or may not have known of Citi's "failure" in advance of his move. Either way the government's pet bank being forced to stick with a token 1-cent dividend while Dimon started cutting checks for shareholders was certainly the cherry on his hot fudge sundae of a day.
The regulations were too restrictive. There is cash on the balance sheets that needs to be freed. The free market can take it from here. At least for the moment it looks as though Mr. Dimon was right all along.
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