Last week we learned two things: that Jamie Dimon specifically telegraphed he is now more powerful than the Fed, and that the US economy is back down to the same March 2009 optical exercises in financial strength gimmickry to stimulate rallies. Recall that on FOMC day, the market barely budged on Bernanke's ambivalent statement and in fact was in danger of backing off as the readthrough was that of no more QE... until JPM announced a major stock buyback and dividend boost. The catalyst: a successful passing of the latest and greatest Stress Test, which according to experts was "much more credible" than all those before it. Wrong. The test was merely yet another complete farce and a total joke. But as expected, the test had its intended effect: financial shares soared across the board, and banks promptly took advantage of investors and robot gullibility to sell equity into transitory strength. Bloomberg's Jonathan Weil explains.
How stressful were the Fed’s tests? One anecdote stands apart: Regions Financial Corp. (RF), which still hasn’t paid back its bailout money from the Troubled Asset Relief Program, passed.
The footnotes to the company’s latest financial statements tell the story. There, the Birmingham, Alabama-based lender disclosed that the loans on its books were worth $8.1 billion less than what its balance sheet said, as of Dec. 31. By comparison, the company’s tangible common equity, a bare-bones measure of net worth, was $7.6 billion.
So if it weren’t for the inflated loan values, Regions’ tangible common equity would have been less than zero, with liabilities exceeding hard assets. In short, the test was a joke, although it had its intended effect. Shares of Regions and other large banks soared, and Regions raised $900 million selling common shares on Wednesday. The company, which hasn’t reported an annual profit since 2007, plans to use the money to help repay the $3.5 billion it got from the Treasury Department in 2008.
Tangible common equity became the capital benchmark of choice for many investors during the last U.S. banking crisis, because the government’s main capital measures lost credibility. It excludes preferred stock, which in substance acts more like debt than it does equity. It also excludes airy intangible assets such as customer relationships and goodwill. (Goodwill is the bookkeeping entry a company records on its balance sheet when it pays a premium price to buy another.)
To calculate tangible common for Regions, I took the company’s $16.5 billion of shareholder equity and subtracted its preferred equity and intangibles. That’s how I got $7.6 billion.
Then I went a step further and adjusted Regions’ remaining net worth to get a more realistic measure. In a crisis, what matters to investors and counterparties about a company’s assets is what they are worth, not what they are carried at on the company's balance sheet. Just ask anyone who got a margin call back in 2008.
Fortunately, companies are required to provide quarterly footnotes showing the estimated fair-market values BACK TO MARK TO MARKET FANTASIES of their financial assets and liabilities, including loans and other items that appear on their balance sheets at historical cost. Factoring in those adjustments, Regions’ tangible common equity was negative $525 million as of Dec. 31.
And yet RF passed with flying colors.
It gets worse:
http://www.zerohedge.com/news/feds-stress-test-was-merely-latest-lipstick-pig-farce?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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