So what is it that you’re doing, and why?
Over the past seven business days, I’ve been meditating for 3 to 4 hours directly outside the entrance of Goldman Sachs headquarters. And I intend to continue sitting silently at Goldman HQ every single business day for the coming weeks and months. Soon this effort will grow beyond me, however. Starting yesterday, we’re holding hour-long group meditations three days per week.
The reason for my meditating at Goldman is that I seek to extend compassion to its employees and demand that they do the same for the worldwide billions affected by the bank’s practices. By meditating, I’m quite literally modeling a technique that cultivates the capacity for emotional states like compassion and empathy. On another level, I’m trying to communicate that I come in peace; I understand that Goldman Sachs bankers are people just like you and me. There’s nothing inherently evil or malicious about them. Like all people, they are the beautifully complicated products of a personal and social history.
Does that mean that we allow them to acquire huge amounts of money, while exacerbating global inequality and its effects? Absolutely not. But we intervene in the way that a family might intervene when their son has a drug addiction. That’s how I think of Goldman Sachs: addiction to greed. And greed, in its various forms, is something that everyone struggles with. The difference with Goldman Sachs is that greed on this scale is causing atrocious human suffering. So we need to put the harmful practices to an end, but with the love and goodwill of a global family.
What drove you to commit to doing this?
The large scale human suffering that is taking place, and the sense that our global trajectory is moving toward even greater amounts of suffering. That, coupled with the realization that our global and national systems of governance are simply not up to the task of preventing such harm. I’ve come to believe that a dramatic shift on inequity issues — like regulating Wall Street — will only result from a mass nonviolent social movement. I see myself as a small, sustained part of that effort.
It’s kind of like the “Standing Man” in Turkey. Has anyone joined you, like people joined him? Do you expect them to?
Yes, exactly. I draw a lot of encouragement from the Standing Man’s passive resistance. He exuded such dignity in his commitment to bearing witness. He seemed to say, “I may not be able to forcibly remove your tear gas cannisters, but I will not gratify you with the act of turning away.”
No one has joined me in the spontaneous way that they joined the Standing Man. However, people did reach out to me after I posted some photos to Facebook and Twitter. Also, from day one I’ve envisioned this Goldman Sachs meditation presence growing beyond me. As a former community organizer, I know that power is in numbers. In this case, we’re seeking to dramatically reign in one of the most powerful institutions in the world, so we must have lots of people as a counterweight.
What kinds of reactions are you getting from Goldman Sachs employees? What about other people?
To be honest, it is very difficult for me to tell how Goldman Sachs employees have reacted. I meditate with my eyes looking down at a 45-degree angle, so I do not know what their facial expressions have been like. No Goldman employees have spoken to me yet, either — well, that’s not entirely true. After the first couple days, the security guards became more and more chummy. Now, when I arrive, they ask me how my day has been. Recently, when my friend came to take a bunch of pictures, they stopped him to make sure it was all right with me.
Most other people have been supportive. They ask me what I’m doing or why, and they respectfully engage with my response. The meanest thing that happened so far was a man yelling, “Get a job!” Little does he know that I work full-time at a Mexican restaurant in Crown Heights. But millions of Americans do not have a job. Does that disqualify them from speaking out — or, in my case, sitting out — against injustice? I think not.
What would be your ideal outcome when you’re done?
The ideal outcome is the formation of a massive meditation protest that helps create political space for the dramatic reform and regulation of the finance industry — especially the megabanks like Goldman Sachs and Morgan Stanley. I know this is a lofty goal, but it’s so terribly important. I envision a perimeter of meditators around the entirety of the gigantic Goldman Sachs headquarters. How incredible would that be?
Are you doing any support work to make your action part of a broader campaign, to make it more effective? Or are you focused on this act of witness?
Yes, I’m most definitely doing support work. As I said, I come from a community organizing background; so I know the importance of coalition building, outreach and trusting relationships. I also know that this kind of organizing is a slow process.
Your sign says “Begin Anew With Compassion.” Why that? Do you really think what Goldman Sachs lacks is compassion? Is meaningful compassion even possible in these institutions of hyper-capitalism?
The sign “Begin Anew With Compassion” is directed toward the employees of Goldman Sachs, not the bank itself. I’m not naïve enough to think that compassion can overcome the structural forces and financial incentives that dictate Goldman’s practices. In that sense, I think it’s absolutely valid for you to speculate about whether “meaningful compassion is even possible” within the constraints of a megabank like Goldman.
However, what I would say is that Goldman’s policies — as with all policies at all institutions — are enacted by people. And those people make a choice about whether or not to extend ethical consideration to those affected by their choices. That’s what we saw with Goldman Sachs Vice President Greg Smith in 2012. He realized that his actions were unethical, and he chose to resign from the firm.
What has the quality of your meditation been like, so to speak? Better or worse than at home?
To answer this, I need to describe my meditation a bit. My meditation practice is following the breath, which means that I focus on the sensations of a single body part — usually the belly — as air comes in and out. The challenge is that when thoughts arise, you simply notice that you’re thinking and immediately return your attention to the breath.
At Goldman, it has been a lot more difficult to sustain continuous attention on the breath. The noise of the street corner — combined with the personal and political significance of the location — makes for an extremely distracting environment. So, if we think of meditation as the practice of focus, then I would say the meditations are worse. But another crucial component of meditation is the practice of acceptance. The more and more I’ve meditated over the years, the more I’ve been willing to be nice to myself when I get distracted. And I think for that practice of compassion — for myself as a struggling meditator and for bankers as human beings — I think my meditations have been significantly better.
“It’s been about five or six years since we last crippled every major market on the planet, so it seems like the time is right for us to get back out there and start ruining the lives of billions of people again,” said Goldman Sachs CEO Lloyd Blankfein.
The nation’s major banks and investment firms say they are ready to give utterly decimating the world’s economies “another go.”
NEW YORK—Claiming that enough time had surely passed since they last caused a global economic meltdown, top executives from the U.S. financial sector told reporters Monday that they are just about ready to completely destroy the world again.
Representatives from all major banking and investment institutions cited recent increases in consumer spending, rebounding home prices, and a stabilizing unemployment rate as confirmation that the time had once again come to inflict another round of catastrophic financial losses on individuals and businesses worldwide.
“It’s been about five or six years since we last crippled every major market on the planet, so it seems like the time is right for us to get back out there and start ruining the lives of billions of people again,” said Goldman Sachs CEO Lloyd Blankfein. “We gave it some time and let everyone get a little comfortable, and now we’re looking to get back on the old horse, shatter some consumer confidence, and flat-out kill any optimism for a stable global economy for years to come.”
“People are beginning to feel at ease spending money and investing in their futures again,” Blankfein continued. “That’s the perfect time to step in and do what we do best: rip the heart right out of the world’s economy.”
According to sources, the overwhelming majority of investment bankers are “ready to get the ball rolling” by approving a host of complex and poorly understood debt-backed securities that are doomed to quickly default, as well as issuing startlingly high-risk loans certain to drive thousands of companies into insolvency.
Top-level executives also told reporters that when it comes to depleting the life savings of millions of people and sending every major national economy into a tailspin, they feel “refreshed and raring to go.”
“The other day I actually overheard someone on the sidewalk utter the words ‘I’m saving up for retirement,’ and right away I thought to myself, ‘Well, time to get down to work,’” said Morgan Stanley chairman James P. Gorman, adding that the increasing number of individuals entertaining ideas of starting their own businesses or buying houses was the financial sector’s cue to set off another devastating global recession. “We’re definitely thinking on a huge scale again, because we all really enjoy toying with the livelihoods of millions of people overseas and forcing them to wonder why reckless, split-second decisions made thousands of miles away dictate their whole country’s socioeconomic future.”
“Plus, it’ll be nice to finally wipe out the Euro once and for all this time,” Gorman added.
While most private equity firms, investment banks, and hedge funds are reportedly still undecided on the precise route to take in order to torpedo the job market and crash all international stock exchanges, sources confirmed they are nearly in position to resume gambling away trillions of dollars belonging to the American populace.
“We’ve got a lot of options on the table; it’s just a matter of picking which one we want to use to paralyze every single sector of the world economy,” said Capital One executive vice president Peter Schnall. “We already burst the dot-com and housing bubbles, so this time we can maybe mix it up by popping the education bubble and shattering the lives of everyone with outstanding student loans. Or maybe we’ll artificially inflate prices of stocks in social media companies and then pull the rug out, bankrupting every investor tied to companies like Facebook and Twitter. Or do both.”
“On second thought, maybe we’ll wipe out the housing market again too, just for the hell of it,” Schnall quickly added. “Might as well, right?”
According to a recent survey of Wall Street officials, 82 percent said they were “excited to shake off the rust” and send the Dow and NASDAQ into another freefall. Additionally, 75 percent of respondents admitted they have been “champing at the bit” for months to wholly undermine the nation’s local banks and money market accounts, leaving Americans too terrified to leave their savings anywhere.
Moreover, the chief financial officers from Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo unanimously told reporters that it has been “way too long” since they last saw the utterly dejected faces of American families whose homes had just been foreclosed on due to circumstances totally beyond their control.
“Now that the public’s efforts to curtail questionable Wall Street trading practices have all but ceased, it’s time for us to bring the world to its knees again,” said AIG CEO Robert Benmosche. “There are still plenty of opaque financial derivatives, high-frequency trading operations, and off-balance sheet transactions out there, all with virtually no federal regulation. Trust me, we can definitely work with that. And if anything, we can always just lobby for further concessions and deregulation in Washington—which, by the way, is so, so easy to do—and then we can cause as much damage as we want.”
Added Benmosche, “And while we’re at it, we’ll make sure we once again come away from this whole thing scot-free and far wealthier.”
Global tax havens harbor close to 1/3 of the world’s GDP.
Tax Havens of the Wealthy and Powerful
More and more companies are stashing their cash offshore, and they’re doing it at alarming rates. Why? Put simply, it’s about eluding the tax man.
– $21 trillion =
– US, Japanese, and German economies combined.
– EU, Russian, and Indian economies combined.
– Total private wealth held in tax havens worldwide.
– $9.8 trillion =
– Private wealth held in tax havens by a mere 100,000 people.
– The amount of foreign aid the US would provide in 196 years at current rates.
“Double Irish with a Dutch Sandwich”
– Profits routed through Irish and Dutch subsidiaries often end up in Caribbean shell corporations that don’t pay US taxes.
– 83 of the 100 largest companies in the US with subsidiaries in tax havens.
Largest Major Corporate Investors
[corporation-unrepatriated income (in millions)]
– General Electric–$108,000
– Exxon Mobile–$47,000
– Johnson and Johnson–$49,000
[corporation-percentage increase in offshore investment 2009-11]
– Spectra Energy–%1141.8+
– Ford Motor–%546+
– Home Depot–%426.3+
– Starwood Hotels–%203+
– Unum Group–%197.6+
– Genworth Financial – %108.5+
Bailed out and bailing ship
Citigroup, Goldman Sachs, and Morgan Stanley were some of the larger bailouts of the 2008 financial crisis.
[corporation-amount received in bailout money-amount shipped offshore since-percentage increase since financial crisis]
– Citigroup–$2,500 billion–$35.9 billion–%32+
– Goldman Sachs–$10 billion–$20,630 million–%27+
– Morgan Stanley–$107 billion–$6,461 million–%61.5+
– %73 of Americans feel that loopholes should be closed allowing corporations and the wealthy to avoid US taxes by shifting income overseas.
– %83 of Americans feel that tax on US corporation’s overseas profits should be increased to equal what their US income tax would be.
– %90 of Small business owners believe that large corporations use loopholes to avoid taxes that smaller businesses have to pay.
[Tax Burden ]
Estimated Federal Income tax losses from tax havens = $150 billion per year
– US corporate untaxed wealth in tax havens= $90 billion
– US individual untaxed wealth in tax havens= $60 billion
– $150 billion = $1026 in additional taxes from every tax filer in the US.
– $150 billion = %6 percent of total reportable income for the US not filed correctly.
In 2007, tax havens accounted for nearly 9% of the world’s gross assets and liabilities. Meanwhile these nations accounted for only .2 percent of the world’s population and .25 percent of the world’s GDP.
[nation title; total portfolio investment (in millions, 2010 data); population 2010] [0= <1 mil]
– Andorra: 217 ; 83,888
– Anguilla: 627 ; 14,764
– Antigua and Barbuda:132 ; 82,000
– Aruba: 1874 ;101484
– Bahamas:17,101 ; 353,658
– Bahrain:11719 ; 1,234,571
– Barbados 2584 ; 276,300
– Belize: 340 ; 312,971
– Bermuda: 402,093 ; 64,237
– British Virgin Islands: 58,888 ; 106,405
– Cayman Islands: 1575332 ; 54,878
– Cook Islands:7 ; 21,390
– Costa Rica: 397 ; 4,563,539
– Cyprus: 18599 ; 1,102,677
– Djibouti: 3 ; 879,053
– Dominica: 1 ; 65,000
– Gibraltar: 3035 ; 28,956
– Grenada: 60 ; 109,553
– Guernsey: 82547 ; 44547
– Hong Kong: ; 7,024,200
– Ireland: 1090520 ; 4,467,854
– Isle of Man: 10394 ; 12,869
– Jersey: 232812 ; 95,732
– Jordan: 2260 ; 6,113,000
– Lebanon: 2670 ; 3,785,655
– Liberia: 7607 ; 4,101,767
– Liechtenstein: 5529 ; 35,789
– Luxembourg: 2051813 ; 502,066
– Macao: ; 552,300
– Maldives: 3 ; 319,738
– Malta: 3389 ; 414,372
– Marshall Islands:12082; 54816
– Mauritius: 12448 ; 1,283,415
– Micronesia: 0 ; 176,815
– Monaco: 80 ; 36,371
– Montserrat: no data ; 5,000
– Nauru: ; 13,000
– Netherlands: 1883690 ; 16,574,989
– Antilles: ; 197,041
– Niue: 0 ; 1496
– Panama:33587 ; 3,504,483
– Samoa: 4 ; 183,123
– San Marino: 84 ; 13,147
– Seychelles: 170 ; 86,525
– Singapore: 173271 ; 5,076,700
– St. Kitts and Nevis: 286 ; 51,300
– St. Lucia: 112 ; 174,000
– St. Martin: ; 77,741
– St. Vincent and the Grenadines:278 ; 125,000
– Switzerland: 712,622 ; 7,785,806
– Tonga: no data ; 103,365
– Turks and Caicos Islands: 902 ; 50,000
– Vanuatu: no data ; 245,036
– Establishing a corporation offshore:
– Three pieces of paper:
– A nominal director declaration states that the nominal director with a tax haven address will follow the direction of the firm’s real owner.
– An undated resignation letter allows the nominal director to duck liability.
– Power of attorney is granted to the corporation’s real owner.
– The Ugland House, one small building in the Cayman Islands is home to some 18,857 companies.
– The state of Delaware, with a population of 917,092, is home to some 945,000 companies, many of which are shells.
So you have a nominal owner, what happens then?
– Like Bidzina Ivanishvili, the Prime Minister of Georgia, you can buy Picasso’s “Dora Maar au Chat” for $95 Million, a full $35 million more than it is appraised for. Just because you want to.
– Also like Ivanishvili, you can provide 60,000 in your home region with free electricity and gas, build twenty schools, a stadium, and provide monthly bonuses to doctors and teachers.
– At $2 million for a 65′ yacht, the global private wealth in tax havens could fill the entire length of the Mississippi River 34.8 times.
The six very large U.S. bank holding companies — JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup (C) Inc., Wells Fargo & Co. (WFC), Goldman Sachs (GS) Group Inc. and Morgan Stanley (MS) — share a pressing intellectual problem: They need to explain why they should be allowed to continue with their dangerous business model.
So far their justifications have been weak, and the latest analysis on this topic from Goldman Sachs may even help make the case for breaking up the financial institutions and making them safer.
egislative proposals from two senators, Democrat Sherrod Brown of Ohio and Republican David Vitter of Louisiana, have grabbed attention and could move the consensus against the modern megabanks. Under intense pressure from Democratic Senator Elizabeth Warren of Massachusetts, Federal Reserve Chairman Ben S. Bernanke conceded recently that the U.S. still has a problem with financial institutions that are seen as too big to fail. Pressed by Republican Senator Chuck Grassley of Iowa, among others, Attorney General Eric Holder is sticking to his story that these companies are too big to prosecute. Cyprus offers another vivid reminder of what happens when banks (S5FINL) become too big to save.
In this context, it is no surprise to see the financial sector wheel out its own intellectual big guns. A frisson no doubt rippled through the financial-lobbying community last week with the release of a report from Goldman Sachs’s equity research team, “Brown-Vitter bill: The impact of potential new capital rules.” This is the A-team at bat, presumably with clearance from the highest levels of management.
Yet instead of providing any kind of rebuttal to the proposals in Brown-Vitter, the report may strengthen the case for breaking up the six megabanks, while also requiring that they and any successors protect themselves with more equity relative to levels of debt. Read the report with five main points in mind.
First, notice the lack of sophistication about bank capital itself. The authors write of banks being required to “hold” capital, as if it were on the asset side of the balance sheet. They go on to construct a mechanistic link that implies that “holding” capital prevents lending.
Banks don’t hold capital. The proposals are concerned with the liability side of the balance sheet — specifically, the extent to which banks fund themselves with debt relative to equity (a synonym for capital in this context). Higher capital requirements push companies to increase their relative reliance on equity funding, thus increasing their ability to absorb losses without becoming distressed or failing. If the transition is properly handled, there is no reason that more equity funding would translate into lower lending.
Second, the Goldman Sachs analysts seem completely unaware of the recent book by Anat Admati and Martin Hellwig, “The Bankers’ New Clothes,” in which those authors — who are top finance professors — debunk the way many bank representatives (including the authors of the Goldman Sachs note) look at issues around capital.
More equity relative to debt on a bank’s balance sheet means that equity and debt become safer: The bigger buffer against losses helps both.
Goldman Sachs makes much of the implications for return on equity, without mentioning any adjustment for risk. Bankers are generally paid based on return on equity without proper risk adjustment. Naturally, they like a great deal of leverage, but the reasoning they use to justify this is fallacious (see Chapter 8 in Admati and Hellwig).
Admati and Hellwig make the broader case that we can run our system much more safely. Goldman Sachs made a big mistake by refusing to take them on directly.
The bank is correct in its assessment that bank equity is higher than it was before the 2007-08 crisis, but this is the natural reaction to a near-death experience. Over the cycle, big banks will again become more leveraged (meaning they will have less equity relative to debt). As a result, Goldman is far too optimistic in its projection of the capital levels that will be needed when the next crisis hits. Current — and likely future – – levels of equity capital are insufficient for our intensely interconnected financial system.
Contrast Goldman Sachs’s note with this excellent speech last week by Tom Hoenig, vice chairman at the Federal Deposit Insurance Corp., on the illusion of the Basel III rules in particular and the right way to think about capital more generally.
Third, while the Goldman Sachs analysts get some points for stating the obvious about Brown-Vitter — “In our view such a bill would incent the largest banks to break up” — they fail to explain why this would be a bad thing.
They do, however, have a line about how banks could only be broken up along existing divisional lines, though they fail to make clear why they believe this is the case or how it would be the best deal for shareholders. Also, once the too-big-to-fail subsidies fade, these new companies would probably be smaller than projected by Goldman Sachs. Less complex, easier to govern and more transparent to supervisors sounds pretty attractive, to officials and investors. (Any client can request a copy of Goldman’s May 2010 report, “U.S. Banks: Regulation.” See Page 32, where it explains how JPMorgan and Bank of America would be worth more if broken up. Richard Ramsden is the lead author of both this report and the one cited above.)
Fourth, the analysts express concern that these smaller companies will be less diversified and therefore more fragile than the megabanks. Delusions of diversification are precisely what brought us to the brink of catastrophe in September 2008. Have the smartest people on Wall Street really learned so little?
From a social perspective, we want a system in which some companies can fail while others prosper, more like the conditions under which hedge funds operate. For macroeconomic purposes, we want diversity within the financial sector, not diversification within Citigroup (which has come close to failing three times since 1982 precisely because of this misperception).
Fifth, on supposed progress to eliminate too big to fail, Goldman’s arguments fall under the heading of what Winston Churchill called terminological inexactitude. The Orderly Liquidation Authority under the Dodd-Frank financial reform law won’t work for complex cross-border banks, such as Goldman, because there is no cross-border resolution authority. Living wills have so far proved to be a joke, and annual stress tests show every sign of becoming a meaningless ritual that undermines serious supervision.
What will move forward the debate? Will it be another money-laundering scandal, another disaster in the European financial system, or further revelations about the London Whale and Libor?
Or will it be thoughtful people sitting down to evaluate the best in-depth arguments for both sides? If it’s Admati and Hellwig v. Goldman Sachs in the court of informed public opinion, reformers win in a landslide.
(Simon Johnson, a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics, is co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.” The opinions expressed are his own.)
To contact the writer of this article: Simon Johnson at firstname.lastname@example.org.
To contact the editor responsible for this article: Max Berley at email@example.com.
Goldman Sachs Really Does Not Like to Be Sued!
You know the power that great wealth can bring when banks sue a judge who does not rule in their favor. The kind of justice system that banks would prefer is one that never finds them guilty of any wrongdoing and, in order to make sure that happens, the banks’ money is fully employed in paying many, many lawyers to do their bidding.
The listing alone of the corporate lawyers engaged in the filing takes four pages!
These banks have already been found civilly guilty of mortgage fraud elsewhere so no one will be surprised at finding many new instances of fraud committed by them.
To no one’s surprise, of course, Goldman Sachs is fully represented in this case.
Why Are Big Banks Going To War With A Federal Judge?
The accusation: shoddy underwriting of mortgage-backed securities.
The request: that banks buy back their ugly securities so shoddily underwritten.
The nation’s largest banks have devised a novel way to protect their interests and save themselves from hundreds of billions of dollars in legal exposure. They’re taking a judge to court.
Lawyers for 17 banks submitted an unusual filing in the Second Circuit Court of Appeals this week (just listing all the corporate lawyers involved takes up the first four pages). The banks – including JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Citigroup and Morgan Stanley – stand accused of ripping off the mortgage giants Fannie Mae and Freddie Mac. The Federal Housing Finance Agency, Fannie and Freddie’s conservator, alleges that these banks improperly sold $200 billion worth of mortgage-backed securities without disclosing the shoddy underwriting of the underlying loans. FHFA argues the banks knew the loans in the securities were bad, yet sold them to Fannie and Freddie anyway, leading to massive losses and the need for a government bailout. So FHFA wants the banks to buy back the securities they improperly sold under false pretenses.
U.S. District Court Judge Denise Cote took over the case in December, 2011, and quickly made a series of rulings in the case, first denying a motion by the banks to dismiss the lawsuit. The bank lawyers have become so dissatisfied with Cote’s rulings, in fact, that they have asked the Second Circuit to reverse them. The filing calls for a “writ of mandamus” that would throw out a series of rulings around discovery, which the bank lawyers claim “deprived Petitioners of their right to obtain evidence.” (You can chew for a moment on the idea that banks are being deprived of their rights.)
Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) lagged behind peers in a key measure of capital strength used by U.S. regulators to stress- test their resiliency in a severe recession.
The three firms submitted more-optimistic estimates of their capital strength and ability to avoid losses on trading and lending than Federal Reserve projections released yesterday for the 18 biggest U.S. banks. Of the three, the gap was widest for Goldman Sachs, which predicted that its Tier 1 common ratio may fall as low as 8.6 percent in a sharp economic downturn, compared with the central bank’s 5.8 percent estimate.
The disparities — including a gap of 1.3 percentage points for JPMorgan — raise the risk that some banks may have been too aggressive while seeking Fed approval to distribute capital to investors through dividends and share repurchases. The companies must maintain Tier 1 common ratios of at least 5 percent under their capital plans. The Fed is set to release the results of those requests next week.
“If you came in with rosier assumptions than the Fed’s own baseline, then you’re definitely at risk of failure” in the capital request, said Christopher Whalen, executive vice president at Carrington Investment Services LLC. “The Fed is going to push back on those banks.”
Spokesmen for JPMorgan, Goldman Sachs and Morgan Stanley, all based in New York, declined to comment.
Goldman Sachs dropped 2.3 percent to $152.98 in New York, the second-biggest decline in the Standard & Poor’s 500 Index. (BBSTI) The Bloomberg Banks Stress Test Index, which includes all 18 firms subject to yesterday’s test, declined 0.2 percent. JPMorgan fell 0.9 percent to $50.20 and Morgan Stanley dropped 0.8 percent to $23.03.
Auto lender Ally Financial Inc. (ALLY) had a capital ratio of 1.5 percent, the lowest of the firms tested. Detroit-based Ally, which is majority-owned by the U.S., disputed the Fed’s results, calling the analysis “inconsistent with historical experience” and “fundamentally flawed.” The company predicted its capital ratio would be 5.7 percent under the Fed’s scenario, according to a filing.
The results are a prelude to the Fed’s capital-plan review of the same banks scheduled for release on March 14. Yesterday’s results don’t forecast next week’s because the first test excludes management’s plans, a Fed official said yesterday on a conference call with reporters.
Banks have said they were coming into this year’s process more cautious even as investors of the six biggest U.S. lenders were anticipating capital payouts that could total $41 billion.
Goldman Sachs Chief Financial Officer Harvey Schwartz told analysts in January that the firm works closely with regulators to ensure it has a “conservative capital plan.”
JPMorgan scaled back its $15 billion share-buyback program by at least 20 percent and hopes to boost the bank’s 30-cent quarterly dividend, Chief Executive Officer Jamie Dimon said this year. The bank’s buyback request was about half of last year’s program, the Financial Times reported today, citing unidentified people familiar with the matter. Joe Evangelisti, a company spokesman, declined to comment.
Morgan Stanley CFO Ruth Porat said in January that her firm only requested approval for buying the remaining 35 percent of its brokerage venture from Citigroup Inc.
Not asking for a lot won’t help lenders if the assumptions they use aren’t appropriately cautious, said Richard Bove, a bank analyst with Rafferty Capital Markets LLC.
“Even if they were conservative in their request, the capital plans will be turned down if the assumptions were too aggressive,” Bove said in a phone interview. “The Fed risks looking like it caved to pressure” if it doesn’t reject those plans, he said.
Goldman Sachs and Morgan Stanley both cited market risk rules under new international capital requirements, which increased risk-weighted assets, as a reason their capital ratios fell in the test.
“We were surprised that the brokers’ capital ratios came so close to the 5 percent minimum requirement, which could limit capital returns,” Brennan Hawken, an analyst at UBS AG, wrote in a research note.
Hawken had estimated that Goldman Sachs would request a $5 billion buyback. That amount would be larger than the firm’s buffer above the 5 percent minimum, he said. Morgan Stanley’s 5.7 percent ratio makes a capital return less likely in the second half of the year, Hawken said.
The banks were hurt by their trading risk, analysts said. The six biggest firms were projected to lose $97 billion on trading in nine quarters through 2014, compared with $116.5 billion in losses estimated in last year’s test, the central bank said. Goldman Sachs and JPMorgan had the most such risk, with the Fed projecting losses of $24.9 billion and $23.5 billion, respectively. JPMorgan said its trading losses would be $17.5 billion.
“It’s a much more volatile business,” said Jennifer Thompson, an analyst at Portales Partners LLC. “In a stressed environment you will have potentially massive losses. The offset should be that they are getting better returns from those businesses. Theoretically, it should all equal out.”
Citigroup, the only U.S. bank among the six biggest to have its capital plan rejected last year, saw its Tier 1 common ratio fall to 8.3 percent under the central bank’s projections. The company sought permission to repurchase $1.2 billion of its shares without seeking a dividend increase, Citigroup said in a presentation after the Fed posted its report.
The planned buyback would “offset estimated dilution created by annual incentive compensation grants,” the New York- based lender said in the presentation.
Since the 2008-2009 financial crisis, U.S. regulators have tried to minimize the odds of another taxpayer rescue, compelling banks to retain some earnings and reinforce their buffers against possible losses. The Fed said the aggregate Tier 1 common capital ratio for the 18 banks would fall from an actual 11.1 percent in the third quarter of 2012 to 7.7 percent in the fourth quarter of 2014 under its scenario.
The Tier 1 common ratio measures a bank’s core equity, made up of common shares and retained earnings, divided by its total assets adjusted for risk using global banking guidelines.
JPMorgan, the biggest U.S. bank, projected that its key capital ratio wouldn’t fall below 7.6 percent, compared with 6.3 percent estimated by the central bank. The lender said pretax losses through 2014 would total $200 million while the Fed said they would be $32.3 billion. JPMorgan also was more optimistic than the Fed in estimating net revenue, loan losses and provisions it would need to cover those losses.
Morgan Stanley estimated its Tier 1 common ratio could fall to as low as 6.7 percent, 1 percentage point higher than the Fed’s projection. The bank’s estimate for net revenue in the stressed period was $5.1 billion higher than the Fed’s.
“Managements probably need to be a little bit more optimistic, the Fed’s a regulator,” Stifel Financial Corp. (SF) CEO Ronald Kruszewski told Matt Miller in an interview on Bloomberg Television’s “Fast Forward” program. “That’s not unusual.”
The Fed’s minimum projected ratio for Bank of America Corp. (BAC), which didn’t request buybacks or a dividend increase last year, would drop to 6.8 percent in the most adverse scenario while Wells Fargo & Co.’s would be 7 percent.
Losses for the 18 firms, which represent more than 70 percent of the assets in the U.S. banking system, would total $462 billion over nine quarters, according to the Fed.
Under the Fed’s worst-case scenario — where U.S. gross domestic product doesn’t grow or contracts for six straight quarters, unemployment peaks at 12.1 percent and real disposable income falls for five consecutive periods — the 18 companies would lose $316.6 billion on soured loans, led by Bank of America. The Charlotte, North Carolina-based firm would lose $57.5 billion, followed by $54.6 billion for Citigroup and $54 billion each for Wells Fargo and JPMorgan.
Home loans were the largest source with $60.1 billion in projected losses on first mortgages and $37.2 billion on junior liens and home-equity loans. Bank of America would face $24.7 billion in losses, as San Francisco-based Wells Fargo would incur $23.7 billion, the Fed estimated.
The next-largest source of bad debt was credit cards, which the Fed estimated would cost banks $87.1 billion. Citigroup, the world’s biggest credit-card lender, led loss estimates with $23.3 billion. Capital One Financial Corp. (COF), which gets more than half its revenue from credit cards, would lose $16.4 billion. The lender’s own analysis estimated credit card losses at $13.5 billion.
“The stress analysis and underlying assumptions are informed by a number of factors, including our experience in the 2008 financial crisis and subsequent recession,” McLean, Virginia-based Capital One said in a presentation on its website.
As a share of a company’s loans, Capital One’s portfolio performed worst, with losses amounting to 13.2 percent of its holdings, according to the Fed. That compares with 6.9 percent for Bank of America and 7.7 percent for JPMorgan.
Dimon, 56, expressed confidence about the outcome of the stress test when he spoke to analysts and investors last week.
“Whatever happens, the company will be fine, as long as we can freely compete with everybody else in the world,” Dimon said Feb. 26 at the company’s investor day. “That, to me, is the most important thing of all.”
The following shows how the 18 biggest U.S. banks performed under the Fed’s preliminary stress test results, which didn’t take into consideration new capital proposals. They are ranked by their lowest projected minimum Tier 1 common ratio under the Fed’s severely adverse economic scenario:
Ally Financial Inc. 1.5 Morgan Stanley 5.7 Goldman Sachs Group Inc. (GS) 5.8 JPMorgan Chase & Co. 6.3 Bank of America Corp. 6.8 Wells Fargo & Co. 7.0 SunTrust Banks Inc. 7.3 Capital One Financial Corp. 7.4 Regions Financial Corp. 7.5 KeyCorp 8.0 Citigroup Inc. 8.3 U.S. Bancorp 8.3 Fifth Third Bancorp 8.6 PNC Financial Services Group Inc. 8.7 BB&T Corp. 9.4 American Express Co. 11.1 State Street Corp. 12.8 Bank of New York Mellon Corp. 13.2
TWO OF the State’s most ambitious developers, Johnny Ronan and Richard Barrett, will see the end of their globe-spanning company, Treasury Holdings, next week after conceding defeat in litigation taken by one of its banks.
Liquidators are expected to be appointed on Tuesday to the insolvent property business by the High Court after the company said it was no longer resisting an application by KBC Bank to have the company wound up over a debt of about €55 million. The rejection of a last-minute offer by US bank Morgan Stanley to buy the company’s debts from the State’s National Asset Management Agency (Nama), which supported KBC’s action, has led to the imminent failure of the group, sources close to the company said.
One of Nama’s top 10 debtors, Treasury has total debts of €2.7 billion, including more than €1 billion with the State loans agency.
Mr Barrett and Mr Ronan have given personal guarantees on a small amount of Treasury’s debts, while Mr Ronan has his own property portfolio and related debts with Nama.
Mr Barrett and Mr Ronan turned Treasury from one of the State’s biggest developers into an international business with projects in Britain, France, Sweden, Russia and China.
Treasury was behind landmark projects, including the five-star Westin and Ritz-Carlton hotels in Dublin and Wicklow, the Convention Centre in Dublin’s docklands, and the Central Park and Spencer Dock office complexes in Dublin.
The hotels and offices will remain open as they are solvent despite the pending liquidation of the parent company. The Convention Centre is owned by the State.
The High Court was told yesterday that, given Treasury’s decision not to fight the winding-up application by KBC, the bank will seek to appoint Paul McCann and Michael McAteer of accountants Grant Thornton as joint liquidators of the company and 16 related companies next week.
Lawyers for the Belgian-owned bank said the winding up of 17 companies was necessary given the scope of Treasury’s property interests.
Nama rejected an offer by Morgan Stanley to buy the group’s debts and an alternative proposal that Mr Ronan and Mr Barrett step aside to allow Treasury be sold by public tender, sources said.
The company felt it had no option but to accept the liquidation of the business as it believed Nama was unwilling to accept any scenario where Mr Ronan and Mr Barrett would remain as owners.
A spokesman for Nama said it had no comment to make.
Relations between Treasury and Nama fell apart earlier this year in a dispute over the agency’s rejection of offers to buy the group’s debts and the decision to seize properties within the group.
Treasury lost a court case in August aimed at stopping Nama.
The court was told yesterday that KBC did not accept an explanation for a transaction in which assets of a subsidiary of Treasury had been transferred to a company in the Channel Islands beneficially owned by Mr Barrett.