Banks Bludgeoned Fed Into $50+ Billion Of Stress-Test Concessions

One reason the final stress test tab for the banks was lower than expected was that the banks persuaded the Fed to drastically reduce its estimate of capital shortfalls.  Bank of America saved $20 billion this way.  Citigroup saved $30 billion.

The other reason was that the regulators ended up using “Tier 1” capital as the solvency metric instead of Tangible Common Equity.  According to some estimates, this saved the banks $70 billion.

The effectiveness of the outcry from the banks looks bad: Yet another example of wimpy Washington being pushed around by Wall Street.  But it’s fair.  The banks know their books better than the Fed ever will, and every judgment the Fed made in its stress tests–including the economic assumptions–was subjective.

From a PR perspective, the stress tests were handled very well (well done, Tim!), and the fact that several of the banks were able to rush out and raise $10+ billion overnight is encouraging (this would have been impossible three months ago).  The main concern about the tests is still that they weren’t strong enough and that the U.S. is now officially following the disastrous Japan Solution of zombie banks and denial.  Time will tell.

The WSJ: 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.

Read the whole thing >

Here are the before-and-after-lobbying stress-test conclusions by bank:

Capital Required Before Lobbying: $35 billion
Capital Requited After Lobbying: $5.5 billion

Bank Of America
Capital Required Before Lobbying: $50+ billion
Capital Required After Lobbying: $34 billion

Wells Fargo
Capital Required Before Lobbying: $17.3 billion
Capital Required After Lobbying: $13.7 billion

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