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 <[email protected]> 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. > > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l > -- Jim Devine / "If heart-aches were commercials, we'd all be on TV." -- John Prine _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
