http://www.zerohedge.com/contributed/2014-03-29/fed-needs-%E2%80%9Cstress-test%E2%80%9D-itself-balance-sheet-balloons-43-trillion
Key segment......
Citigroup has risen from a low of $9.67 to a current price over $50.
Citigroup now wants to buy back shares. This is nonsensical (except from the point of view of insiders who are bailing like mad and will sell every share straight into those buybacks).
Mike "Mish" Shedlock
and.........
Submitted by Tyler Durden on 03/26/2014 16:17 -0400
Key segment......
Fed Stress Tests “Rattle Banks Around The World”
Yesterday, the Federal Reserve’s stress tests led to jitters in financial markets and in the words of the Financial Times “rattled banks around the world.” Citigroup’s share price was hammered and fell 5.4%
The aftershock of the stress tests was felt beyond U.S. shores for the first time. The U.S. subsidiaries of Royal Bank of Scotland, Santander and HSBC all failed on “qualitative” grounds, which includes failing to project losses rigorously when contemplating a severe recession or market meltdown.
The Fed said that the banks management practices or capital cushions are not robust enough to withstand a severe economic downturn. Not surprisingly, the banks themselves accused the stress tests as being “opaque”.
Twenty five other banks took part in the Fed's annual "stress test" and received a green light for their planned dividend payouts and share repurchases. Bank of America and Goldman Sachs initially fell short of minimum capital requirements. However, they met the standards after reducing their planned dividend payments and share buybacks over the past week.
The banks now have 90 days to address the weaknesses and risks identified by the Fed and resubmit their dividend and share buyback plans.
The Fed's decision was part of the annual checkup it requires of banks with more than $50 billion in assets. Banks must now undergo tests to ensure they can endure shocks like those that upended the banking system and led to the massive government bailouts in the 2008 financial crisis.
In what the Fed sees as the extreme scenario, the test assumed a rise in the 6.7% unemployment rate to 11.2%, a 50% drop in stock prices and a decline in home prices to 2001 levels. All of which appear a strong possibility given debt burdened state of the tapped out U.S. consumer and the poor fundamentals of the U.S. economy.
Indeed real levels of unemployment in the U.S. are likely well over 11% already.
St Louis Federal ReserveIt is important to note that if the Federal Reserve’s assets were marked to market, it itself is insolvent.
The Fed's balance sheet has ballooned to $4.3 trillion from $800 million in the past five years as the central bank has electronically created trillions of dollars in order to buy their own government bonds and mortgage-related bonds in a radical and indeed reckless attempt to kick the can down the road and prevent a systemic event or a recession or depression.
The Federal Reserve is likely to suffer significant losses on its Treasury holdings once interest rates rise from historic lows. Indeed, the researchers at the San Francisco Fed have recently called for "stress tests" on the Fed itself and it’s assets and income, an echo of the central bank's annual exercise for the nation's largest banks.Educate yourself about the threat bail-ins pose to your livelihood by reading: Bail-In Guide: Protecting your Savings In The Coming Bail-In Era (10 pages)
Indeed real levels of unemployment in the U.S. are likely well over 11% already.
St Louis Federal ReserveIt is important to note that if the Federal Reserve’s assets were marked to market, it itself is insolvent.
The Fed's balance sheet has ballooned to $4.3 trillion from $800 million in the past five years as the central bank has electronically created trillions of dollars in order to buy their own government bonds and mortgage-related bonds in a radical and indeed reckless attempt to kick the can down the road and prevent a systemic event or a recession or depression.
The Federal Reserve is likely to suffer significant losses on its Treasury holdings once interest rates rise from historic lows. Indeed, the researchers at the San Francisco Fed have recently called for "stress tests" on the Fed itself and it’s assets and income, an echo of the central bank's annual exercise for the nation's largest banks.Educate yourself about the threat bail-ins pose to your livelihood by reading: Bail-In Guide: Protecting your Savings In The Coming Bail-In Era (10 pages)
Wednesday, March 26, 2014 9:14 PM
Jackass Buyback Proposal: Fed Rejects Citigroup Share Buybacks and Dividend Increase
For the second time in three years Fed Rejects Citigroup Share Buybacks and Dividend Increase.
The Federal Reserve on Wednesday rejected Citigroup Inc's plans to buy back $6.4 billion of shares and boost dividends, saying the bank is not sufficiently prepared to handle a potential financial crisis.Jackass Buyback Proposal
Officials at the bank never saw the rejection coming, a source close to the matter said on Wednesday.
The rejection underscores that whatever strides Citi's chief executive, Michael Corbat, has made in fixing the bank's difficulties, he still has work to do. Shares of Citigroup, the third-largest U.S. bank, fell 5.4 percent to $47.45 in after-hours trading.
Since taking the reins at the bank in 2012, Corbat has been working hard to cultivate close relationships with regulators in Washington. His predecessor, Vikram Pandit, had a famously testy relationship with the Federal Deposit Insurance Corp's then chairman Sheila Bair, among other regulators.
But even after mending fences in Washington, Corbat was blindsided by the Fed's decision to nix his plan for paying out money to shareholders. His first hint that something might be awry with the bank's capital plans came last week, when the Fed disclosed its views of how global turmoil would affect the bank's capital levels, the source said. The Fed's projections were much less rosy than Citi's.
The bank, like its competitors, faces two opposing goals. It wants to have large amounts of capital to please regulators; it also wants to please its shareholders, and high levels of capital weigh on profitability.
Citi was one of five banks whose payout plans were rejected by the Fed on Wednesday. Three were the U.S. units of European banks. The fifth, Zions Bancorp, was expected because it was the only bank last week to fail a model run of a simulated crisis similar to the 2007-09 credit meltdown in the first part of the Fed's stress tests.
Citigroup has risen from a low of $9.67 to a current price over $50.
Citigroup now wants to buy back shares. This is nonsensical (except from the point of view of insiders who are bailing like mad and will sell every share straight into those buybacks).
Mike "Mish" Shedlock
and.........
Citi Tumbles Below $5/Share On A Split-Adjusted Basis After Failing Another Fed Stress Test
Another year, another failure by Citigroup to i) pass the Fed's stress test and ii) be able to stop investing cash in such idiotic fundamental concepts as CapEx, and instead reward activist shareholders with increased dividends and buybacks. As theWSJ reports, Citigroup "failed to get Federal Reserve approval to reward investors with dividends and stock buybacks, a significant blow to Chief Executive Michael Corbat's effort to bolster the bank's reputation following a 2008 government rescue." Hardly surprising for a bank which effectively was wiped out in the crisis and which only survived thanks to the Fed-backed crammed-up, spinoff of billions of toxic assets into a bank bank, however certainly surprising for a bank that is supposed to be "fixed" five years into a "recovery." What's worse, the stock is now trading below the infamous $5 level on a pre-split adjustment level - the same split that was supposed to at least optically, give the impression that things at Citi are ok. Turns out optics is only half the answer.
Citi wan't the only one: the Fed rejected capital plans of five large banks and approved 25 as part of its annual "stress tests" measuring a firm's ability to survive a severe economic downturn. Companies must fare well on the test to win the regulator's approval for returning money to shareholders. Citigroup's rejection was based on deficiencies in the bank's capital-planning practices, including its ability to project revenue and losses under a stressful scenario and to adequately measure its exposures, according to the Fed.
The five institutions that didn't get approval—Citigroup, Zions Bancorp, and the U.S. units of HSBC Holdings PLC, Royal Bank of Scotland Group PLC and Banco Santander —must submit revised capital plans and must suspend any increased dividend payments unless they get the Fed's approval in writing. The foreign banks that didn't pass muster with the Fed are restricted from paying increased dividends to their parent firm. The five banks that failed to get their plans approved can continue to pay dividends at last year's level.
Others, those closer to the Fed of course, were more lucky:
The Fed approved the shareholder-reward plans for Bank of America Corp. BAC -0.06% and Goldman Sachs Group Inc. GS -0.92% only after the two banks adjusted their requests. Both of the banks initially fell below minimum capital levels in the Fed's 'severely adverse' stress testing scenario and resubmitted their plans last week.
And from Bloomberg, here is why specifically, the Fed just sent Citi's stock back under $5 on a split-adjusted basis:
- Citigroup’s plan was objected to because “heightened supervisory expectations for the largest and most complex [bank holding companies] in all aspects of capital planning,” Federal Reserve said in its annual Comprehensive Capital Analysis and Review released today.
- “While Citigroup has made considerable progress in improving its general risk-management and control practices over the past several years, its 2014 capital plan reflected a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there was not sufficient improvement.
- "Practices with specific deficiencies included Citigroup’s ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations, and its ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures.
- "Taken in isolation, each of the deficiencies would not have been deemed critical enough to warrant an objection, but, when viewed together, they raise sufficient concerns regarding the overall reliability of Citigroup’s capital planning process to warrant an objection to the capital plan and require a resubmission.”
It is almost as if the Fed has already picked which bank will be this round's sacrificial Lehman when the moment comes to pull the plug on this particular bubble...
whocouldanode? credit, that's who!
And here is Citi's response:
The Federal Reserve Board (Fed) announced that it objected to the capital plan submitted by Citi as part of the 2014 Comprehensive Capital Analysis and Review (CCAR). The capital actions requested by Citi included a $6.4 billion common stock repurchase program through the first quarter of 2015 and an increase of Citi’s quarterly common stock dividend to $0.05.
Citi will be permitted to continue with its current capital actions through the first quarter of 2015. These include a $1.2 billion common stock repurchase program and a common stock dividend of $0.01 per share per quarter. These actions are subject to approval by Citi’s Board of Directors in the normal course.
Michael Corbat, Citi’s Chief Executive Officer, said: “Needless to say, we are deeply disappointed by the Fed’s decision regarding the additional capital actions we requested. The additional capital actions represented a modest level of capital return and still allowed Citi to exceed the required threshold on a quantitative basis.
“We will continue to work closely with the Fed to better understand their concerns so that we can bring our capital planning process in line with their expectations and meet their standards on a qualitative basis as well. We have not yet made a decision as to when we will resubmit our plan.
“We clearly are being challenged to meet the highest standards in the CCAR process. Despite whatever shortcomings the Fed saw in our capital planning process, we have made tremendous progress over the past several years in enhancing our capital position and Citi remains one of the best-capitalized financial institutions in the world. We will continue to work incredibly hard to serve our clients and generate the returns our shareholders expect and deserve,” Mr. Corbat concluded.
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