March, Tuesday 13, 2012

DOW + 217 = 13,177
SPX + 24 = 1395
NAS + 56 = 3039
10 YR YLD + .08 = 2.11%
OIL +.04 = 106.75
GOLD – 25.70 = 1676.10
SILV - .20 = 33.51
PLAT – 7.00 = 1692.00

It's a crazy world. Stocks posted their best day of the year. Go figure.

The big boost seems to be JPMorgan announcing a dividend, while at the same time 3 banks failed the Fed's Stress Test. Wait a minute, you're asking yourself, “Self, am I going crazy or was the Fed supposed to release the results of the Stress Test on Thursday?” And of course, the answer is yes.

The Fed, in releasing its annual stress test results, said 15 of the 19 largest banks would have satisfactory capital buffers, even after considering banks' proposed dividend increases or share buybacks.

The regulator said Citigroup, Ally Financial, SunTrust, and MetLife fared worst under the supervisory stress ratios, with Tier 1 common capital ratios of 4.9 percent, 2.5 percent, 4.8%, and 5.1 percent, respectively. The bank holding companies that came out top were Bank of New York Mellon with a Tier 1 common capital ratio of 13.1 percent under the hypothetical financial shock, State Street Corp with 12.5 percent and American Express with 10.8 percent.

Bank of America came in with 6.2 percent, and JPMorgan's result was 5.4 percent.

So, only 4 out of 19 enormous financial institutions failed the stress test, meaning that just over one-quarter of the biggest banks in the country could implode at any moment, and of course if 4 of the banks implode, the interconnectedness of all banks would mean the utter and total collapse of the financial system as we know it, because they forgot to stress test counter-party risk in these scenarios,  but hey, that's just one guess. Maybe the banks are adequately hedged through appropriate financial vehicles written by other well capitalized banks that are also hedged in a similar manner, so no worries. The other guess is that the stress test results help to take the uncertainty out of the markets and that's why the Dow Industrials gained a couple of hundred points.

Funny, I don't remember stress test results during the boom years. You would think, since the depression was downgraded to a recession and the recession is history, and we are in a period of organic growth, with lots of green shoots, and consumers are spending again, and jobs are as plentiful as lollipops at bank teller windows; Shirley there should be no reason to stress test large banks. Didn't we correct the sins of the past and there will be no more bailouts?

And just how accurate are these Stress Tests? Goldman Sachs scored the same as SunTrust and SunTrust failed the test but Goldman apparently got some extra credit by taking an essay test.

The pass fail line was 5. JPMorgan pulled down a 5.4. JPMorgan will raise its quarterly dividend by a nickel to 30 cents and buy back as much as $12 billion of stock this year. The Federal Reserve approved the buyback and dividend increase, even though banks will be required to meet higher capital thresholds by 2019. Just remember this in the event JPMorgan comes hat in hand begging for another bailout; just remember that they made a specific decision to pay off shareholders rather than shore up capital reserves.

JPMorgan's announcement was a back door way of announcing they had passed the Fed's stress test, and so it became necessary to release the results of the stress test – prematurely. And once JPMorgan made the big announcement, the others piled on. U.S. Bancorp hiked its dividend by 56% and will buy back up to 100 million shares after passing the Federal Reserve's stress test. The bank said it will raise its quarterly dividend to 19.5 cents a share from 12.5 cents a share. Morgan Stanley said they would continue with their current dividend and increase their stock buyback. BB&T increased its dividend by 4 cents.

Meanwhile, Citigroup failed the Stress Test. Citi's share price dropped 44 percent last year. So as you can imagine, heads were rolling over at Citi. It was so bad that Citi's CEO Vikram Pandit was awarded a new pay package that included $1.7 million in salary plus a cash bonus of $5.3 million plus another bonus of stock options valued at $7.8 million; for a total of $14.8 million. Now, normally I don't care very much about CEO compensation. I realize that it is sometimes unseemly. I realize that it is all part of a grab it while you can mentality, but I just don't like to look in another man's wallet. And besides, Peyton Manning made more last year than Vikram Pandit, and Manning was on the sidelines, and he didn't play one minute of football.

Still, I bring it up today because of the Citigroup compensation committee's announcement, which said: “The committee awarded annual incentive compensation, in addition to salary, to Mr. Pandit for the first time in four years in a manner commensurate with his responsibilities and the success of his implementation of Citi's long term strategies.”

Apparently, Citi's long term strategy is to fail the stress test, not set aside sufficient capital reserves, and to drive the share price into the ground. As business plans go, I've seen better but I do think Mr. Pandit is the best man for the job. 

Meanwhile, the Federal Reserve Federal Open Market Committee has been meeting. They decided to leave interest rates unchanged at zero percent for a few more years. I know you're shocked. The statement from the Fed was the epitome of bland. The Fed said it expects "moderate" growth over coming quarters with the unemployment rate declining gradually; in January, it said it expected "modest" growth.

It also said a recent spike in energy costs would likely push up inflation, but only temporarily. Over a longer stretch, the Fed said inflation would likely run at or below the its 2 percent target. Everything is basically on target, as expected, moderate, and modest. Which I think means the Fed will continue to ZIRP the economy and continue to provide stimulus without calling it quantitative easing part 3.

Bill Gross, the co-chief investment officer of PIMCO, disagreed with the Fed's pronouncement that inflationary expectations have remained stable, saying the Fed "is playing a game" by saying otherwise. Gross thinks the Fed will need to juice the economy considerably by April.

Let's do a breakdown of the FOMC statement:

The FOMC continues to see "significant downside risks" but softened this statement to acknowledge that "strains in global financial markets have eased." In the same vein the committee dropped the phrase "notwithstanding some slowing in global growth" from the first paragraph.

The FOMC upgraded its assessment of the economic outlook. The committee acknowledged that the unemployment rate has declined "notably" in recent months, and that it expects it to decline "gradually". They upgraded their assessment of business fixed investment from "has slowed" to "has continued to advance." The committee now expects "moderate" instead of "modest" growth over the coming quarters. I think these guys sit around with dictionaries, trying to determine the value of a word. I think they need to hire poets at the Fed, somebody who can pinpoint a word with absolute clarity, and maybe even an occasional rhyme.

Anyway, the FOMC acknowledged the likely implications of the recent run-up in energy prices, saying that "inflation has been subdued in recent months," but the committee added "although prices of crude oil and gasoline have increased lately." The committee acknowledged that "the recent increase in oil and gasoline prices will push up inflation temporarily" but continues to anticipate that "subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate."

The FOMC signaled that policy rates will remain low “at least through late 2014”.

Go figure.

American Banker has released the first in what will be a series of stories on debt collection abuses by the JPMorgan. It confirms critics’ worst accusations against the financial services and belies Jamie Dimon’s tiresome assertions that JP Morgan is better than its peers. Dimon may still be right if you think excelling in abusing and extorting customers is commendable. The American Bankers story discusses the operations of a unit that handled delinquent credit card borrowers. According to a whistlblower complaint with the SEC in 2010, there were a few problems with the collection unit.

Chase Bank sold to third party debt buyers hundreds of millions of dollars worth of credit card accounts. . .when in fact Chase Bank executives knew that many of those accounts had incorrect and overstated balances.

Chase Bank executives routinely destroyed information and communications from consumers rather than incorporate that information into the consumer’s credit card file, including bankruptcy notices, powers of attorney, notice of cancellation of auto-pay, proof of payments and letters from debt settlement companies.

Chase Bank executives mass-executed thousands of affidavits in support of Chase Banks collection efforts and those Chase Bank executives did not have personal knowledge of the facts set forth in the affidavits.

And of course, there are robosigners, too. By law, collection affidavits require the signer to be familiar with the bank’s pertinent records. And you thought robosigners only signed off on mortgage documents?

But wait, there's more:

The inspector general's office at the U.S. Department of Housing and Urban Development released a report today showing top banks impeded a federal inquiry into their foreclosure processes,  dragging their feet on turning over documents and blocking investigators' attempts to interview bank employees. The inquiry led to the $25 billion mortgage settlement with the five largest mortgage servicers that was announced last month, but the banks hampered an early investigation into whether they were pursuing unlawful foreclosures through shoddy paperwork and lax controls.

Bank of America, for example provided only excerpts of files, incomplete documents, and conflicting information to government investigators, and refused to provide some of its foreclosure policies. It also limited employee interviews, and refused to let employees answer certain questions. And the other big 4 banks had similar problems. For example, one notary said the daily volume of documents had increased from 60, to 200, to 20,000.  This is what the banks think of contract law.

Let's check in on the situation in Europe. Greece has done everything it was asked to do to receive a bailout. The Compliance Report by the European Union's executive describes the progress of Greek reforms necessary for the release of new money to Athens and recommends the first disbursement be made as soon as possible, except of course the money won't go to Greece, it will go to the bankers. The report said a package of savings adopted by Greece in early 2012 worth 1.5 percent of gross domestic product should allow Athens to meet the target of bringing the primary deficit down to 1 percent this year.

"However,” the Commission report said, “current projections reveal large fiscal gaps in 2013-14,"  adding that the shortfall for the two years totaled 5.5 percent.

"Therefore, substantial additional expenditure cuts will have to be announced and adopted by Greece in the coming months, in particular when Greece updates its medium-term budget in May 2012."

So, the deal is more austerity, more job cuts, fewer public programs or they'll cut off the money, again. After extracting a pound of flesh, they want just a little more. Greece holds parliamentary elections in April. So, the still have a chance to make some changes. Small chance, but it is a chance.

The 2012 Retirement Confidence Survey, published by Employee Benefits Research Institute, found workers in January as gloomy as they have ever been about their retirement prospects. The survey, which measures workers' and retirees' views of the future rather than actual savings data, has been conducted annually for 22 years and is largely underwritten by financial services firms. Workers are saving less, worrying more and may be unrealistic about their ability to work as long as they think necessary to afford retirement.

Some 60 percent of workers surveyed said they had less than $25,000 in household savings (excluding their homes and traditional pensions); 34 percent said they had pulled money out of savings to pay for basic expenses; and only 52 percent said they felt even somewhat confident that they would have enough money to live comfortably through their retirement years. Some workers could be in better shape than they may think they are. For example, workers who had calculated their retirement needs had significantly higher confidence levels than those who had not done the math. Still, there are a whole bunch of people who are not prepared.

The survey revealed sharp differences in retirement readiness between respondents at upper versus lower income levels. Of that 60 percent who said they lacked significant savings: 57.35 percent have household income under $35,000, 50 percent are under age 40, and 21.6 percent have defined benefit plans.

 Only 58 percent of workers said they were currently saving money for retirement, compared with a peak of 65 percent in 2009. The decline in the number of people saving was all in households earning less than $75,000. Furthermore, significant numbers of workers said they had to make unplanned withdrawals from their savings in order to meet ordinary expenses.

More workers now (than in previous surveys) are depending, perhaps unrealistically, on their ability to work longer: 37 percent say they expect to work after age 65, as compared to 24 percent in 2007 and 18 percent in 2002. The full retirement age is now 66, but workers appear to be looking further out than that. In the 2012 survey, 26 percent of workers said they expect to be 70 or older when they retire and another 7 percent said they would "never retire."

But EBRI cited "a considerable gap between workers' expectations and retirees' experience." In 2012, roughly half of the retirees surveyed said they left the workforce earlier than they had planned to, mainly because of health problems or disabilities, or because they were forced out of their jobs.