Re: [Pen-l] Capitalism and the state (cont'd)

[Jim Devine <jdevine03@xxxxxxxxx>]

this is what's called "regulatory forbearance" in the banking biz and
what added billions to the cost of mopping up the Savings & Loan
mess...

On Sat, May 9, 2009 at 7:09 AM, Marv Gandall <marvgandall@xxxxxxxxxxxx> wrote:
> Banks Won Concessions on Tests
> Fed Cut Billions Off Some Initial Capital-Shortfall Estimates; Tempers Flare
> at 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.
>
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-- 
Jim Devine / "If heart-aches were commercials, we'd all be on TV." -- John Prine
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