Why is the Fed so stressed about BofA's finances?
COMMENTARY U.S. regulators are so stressed about how well Bank of America will perform in upcoming stress tests, they're threatening the bank if it doesn't shape up. Kind of makes you wonder what's going on behind the books, doesn't it?
BofA has been operating under a "memorandum of understanding" with bank watchdogs for the last two years. The memo -- which is private -- came about after many struggles with regulators and addresses of governance, risk and liquidity management, according to the Wall Street Journal. While BofA directors feel they are in compliance with the memo, the government thinks otherwise and it has the deciding vote.
The U.S. is now saying if the bank doesn't take steps to strengthen its position, it will face a public enforcement action. Which means you, me and perhaps most importantly the bank's stockholders would find out the bank's true financial condition. Again, kind of makes you wonder ... doesn't it?
This comes as the Fed readies stress tests for BofA and the nation's five other largest banks. The government wants to see how well they would do "if" (wink, wink, nudge, nudge) there was a major market shock as the result of financial problems in Europe. The Fed says it intends to publish the results for The Usual Suspects (BofA, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, Wells Fargo) in March. All those who think the EU situation won't boil over before then raise your hands. Yep, it's unanimous.
Not only will the results likely be too late to help investors, but they'll be even less illuminating than past stress tests. In other words, the tests were seen as a way to reassure investors without actually disclosing significant information. In this round of tests, the government will actually make public less information than they did for 2009's round of tests. Not exactly comforting to know, is it?
Despite the open-book nature of the tests, the banks are very cranky because it likely means having to increase their capital holdings. They would rather be using their "profits" for stock buybacks and to pay dividends. I put profits in quotes because the earnings aren't the result of any actual improvement in business but are courtesy of lower capital requirements. Notice there is no mention of using the money to increase lending. (The banks are also cranky because -- and I'm not making this up -- it means they will have to work over the holidays. Have they noticed the unemployment rate lately? I know quite a few people who would be very happy about working the holidays.)
What's odd about the banks being asked to raise capital holdings is that it comes at a time when they are so flush with deposits they actually do not know what to do with all the money.
Kind of makes you wonder ... doesn't it?
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