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The Fed's Stress Test Was Merely The Latest "Lipstick On A Pig" Farce

Tyler Durden's picture




 

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 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:

The Fed’s analysis, by contrast, didn’t take changes in liquidity or market conditions into account when estimating the future losses on banks’ loans or securities, except where the companies were using fair-value measurements for such assets already. A company might have large paper losses in its “held to maturity” or “available for sale” bond portfolios, for instance. The Fed said such losses only counted if they were due to a bond issuer’s inability to pay its obligations, as if that were the only factor affecting bond prices.

Similarly, were Regions to sell its loans, it wouldn’t be able to realize the $73.3 billion it showed as an asset on its balance sheet. In the footnotes, Regions estimated its loans were worth $65.2 billion using the values that “a market participant would use in a hypothetical orderly transaction.” The Fed ignored these values.

 

In a press release, Regions Chief Executive Officer Grayson Hall said the Fed’s capital review “demonstrates the strength of our company.” If you want to see how strong Regions really is, though, the footnotes offer a clearer picture.

 

Regions probably would have failed years ago if not for its federal backstop. Instead, it now has a stock-market value of $9.1 billion. Clearly the Fed wanted it to attract new investors, and those who put fresh capital into Regions this week believe the government won’t let it die. That about sums up the company’s value proposition. In other words, we’re all still on the hook.

What is sad, is that even the general public is now increasingly more aware of these outright gimmicks by the Federal Reserve-Wall Street cartel, and refuses to participate in stock rallies premised on fraud and erroneous data interpretations, forcing the banks themselves to inflate their own asset values even higher in a coordinated incestuous circle jerk of intra-Primary Dealer stock purchases, resulting in an even greater disconnect with the underlying reality. Because at the end of the day, what it all boils down to, is simple cash flow. And that, despite all the Fed's mock tests and words of encouragement, in a world of perpetual contract law abatement, is lacking more than ever. After all, why pay for something today, when the administration itself tells you not to?

Alas, the relentless encroachment of socialism is something that not even the most naive and gullible 'stress test" can mask.

 

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Sun, 03/18/2012 - 11:26 | 2267054 Flakmeister
Flakmeister's picture

What fraction of the Fed is "owned" by JPM???

Sun, 03/18/2012 - 12:00 | 2267115 Sisyphus
Sisyphus's picture

Not much, just the Glans, as it doesn't matter if the Frenulum or the Shaft is owned or not. If you can bite off the head, the snake will die; therefore, they have the Glans in a vice grip and have the Fed under their total control. The twitch you notice on Ben's lips is because he's unconfortable of the pressure exerted downstairs.

Sun, 03/18/2012 - 12:27 | 2267176 WmMcK
WmMcK's picture

After reading that, I feel "unconfortable".

Sun, 03/18/2012 - 13:29 | 2267302 Troll Magnet
Troll Magnet's picture

Fuck this. I'm buying more gold and silver!

Sun, 03/18/2012 - 20:51 | 2268181 StychoKiller
Sun, 03/18/2012 - 11:26 | 2267055 GeneMarchbanks
GeneMarchbanks's picture

It's like that kid in pre-school, you know, the one who takes a massive dump in the corner of the room and still gets a gold star...

Sun, 03/18/2012 - 14:07 | 2267231 Normalcy Bias
Normalcy Bias's picture

That reminds me of those running our govt, who frequently seem to have failed their way to the top.

Sun, 03/18/2012 - 11:35 | 2267070 Lost Wages
Lost Wages's picture

Going long on pig lipstick.

Sun, 03/18/2012 - 11:44 | 2267086 brewing
brewing's picture

long maybelline...

Sun, 03/18/2012 - 12:23 | 2267167 WmMcK
WmMcK's picture

Maybe she was born with it ...

Sun, 03/18/2012 - 12:51 | 2267072 scatterbrains
scatterbrains's picture

Now that we know the fed is Jamie Diamond's nut licker when should we expect JPM to trash equities and force the fed to print more money for them ?

 

Sun, 03/18/2012 - 11:37 | 2267075 grgy
grgy's picture

That is a dead on comparison.  You've nailed it!

Sun, 03/18/2012 - 11:41 | 2267081 DormRoom
DormRoom's picture

There's still the 7 TRILLION dollar question about MERS, and chain of titles.

 

http://www.economonitor.com/lrwray/2012/03/16/the-7-trillion-dollar-ques...

 

Big Banks will not survive, if MERS, and chain of titles are widely disputed in court, and homeowners win.

Sun, 03/18/2012 - 11:59 | 2267111 Rusticus
Rusticus's picture

Nothing the Supreme Court can't fix. They've already ruled on corporate personhood, simply a matter of ruling that defaulters aren't persons.

Sun, 03/18/2012 - 16:07 | 2267641 spinone
spinone's picture

They will litigate and ex post facto away our property rights by a thousand cuts.

Sun, 03/18/2012 - 11:50 | 2267098 Weisbrot
Weisbrot's picture

I understand that almost nothing in goverment and finance is 100% as described but this seems a bit much - Also isnt the lender of last resort supposed to be a backstop?

Sun, 03/18/2012 - 13:03 | 2267103 LawsofPhysics
LawsofPhysics's picture

There have been a number of time throughout history when "litigation" against banks has been tried, revolutions aside, exactly how many times have the "homeowners" or "average Joes" actually "won".

 

Excluding revolutions, the answer is is fucking never.

 

In addition, riddle me this; what happens when your "lender of last resort" is insolvent?

Sun, 03/18/2012 - 11:50 | 2267100 Dr. Engali
Dr. Engali's picture

The speed at which the government is moving to lock down the people of the U.S.S.A tells me things are pretty darn close to collapsing.

http://m.whitehouse.gov/the-press-office/2012/03/16/executive-order-nati...

Sun, 03/18/2012 - 13:17 | 2267267 Jake88
Jake88's picture

Extremely ominous.

Sun, 03/18/2012 - 14:05 | 2267379 Blue Horshoe Lo...
Blue Horshoe Loves Annacott Steel's picture

(d)  improve the efficiency and responsiveness of the domestic industrial base to support national defense requirements; and

Sounds like when they had our manufacturing base during WWI & WWII become weapons manufacturers.

Are they getting ready for the Iran attack & subsequent WWIII?

Wed, 03/21/2012 - 14:39 | 2277344 MeelionDollerBogus
MeelionDollerBogus's picture

it's not just the weapons, it's the jobs.

Looks like this is the jobs program.

Sun, 03/18/2012 - 11:53 | 2267104 Acet
Acet's picture

"Alas, the relentless encroachment of socialism is something that not even the most naive and gullible 'stress test" can mask"

This is not Socialism, this is Fascism.

Wether one agrees it's the right thing or not, Socialism is ultimatelly and in the extreme about equalizing everybody's wealth.

The shit we see going on today is exactly the opposite: it's all about moving the wealth from the many to the well connected few. The only Social-anything in this crap is that it's the whole Society that's paying for these parasites.

 

Sun, 03/18/2012 - 12:27 | 2267175 vh070
vh070's picture

Right on the money.  Dispensing with the silly labels would improve the dialog.  Is wealth inequality too far in any direction?  If so, prudent government should legislate to move the balance in the opposite direction.  Let the imbalance go too far and you get social instability and/or a poor economy.  But yeah, we're closing in on the fascist extreme too quickly.

Mon, 03/19/2012 - 02:10 | 2268734 amadeusb4
amadeusb4's picture

Thank you.

Sun, 03/18/2012 - 12:05 | 2267129 TradingJoe
TradingJoe's picture

Get ready for a DIVE!

Sun, 03/18/2012 - 12:06 | 2267130 russwinter
russwinter's picture

The Fed's Stress Test Showed Zero Integrity

http://www.wallstreetexaminer.com/blogs/winter/?p=4663

Sun, 03/18/2012 - 12:06 | 2267134 Robslob
Robslob's picture

Let's make this simple...

Ben knew, as did all the other unsurprised bankers who were ready to sell, that this was planned and Jamie D didn't do anything they ALL had not already agreed upon.

Sun, 03/18/2012 - 12:11 | 2267143 WTFIGO
WTFIGO's picture

"... the relentless encroachment of socialism ..."

Bull shit, it isn't socialism, it is crony capitalism at its worst!

Sun, 03/18/2012 - 12:18 | 2267156 GeneMarchbanks
GeneMarchbanks's picture

Just call it 'corporatism' and split the difference.

Sun, 03/18/2012 - 12:26 | 2267173 Tsar Pointless
Tsar Pointless's picture

Bingo, Gene.

When others try to tell you its either communism or socialism, you know they're uneducated dipshits.

Sun, 03/18/2012 - 13:18 | 2267273 tickhound
tickhound's picture

I look at the MBA's around me regurgitating Billo's talking points from the night before and I think "conditioned and indoctrinated"

and then there's Kudlow and his faux "free market capitalism is the best path to prosperity".... AS IF.

Sometimes its easier to enlighten the "under-educated" than the GS-58 highly educated beneficiary of the ponzi. 

Where I live, the hardest part of their day is waking up in the morning.

Sun, 03/18/2012 - 13:43 | 2267327 Blue Horshoe Lo...
Blue Horshoe Loves Annacott Steel's picture

Fascism/corporatism.

What's with all the fear of socialism? Fascism's worse.

Seems only the right-wingers I know keep bringing up that straw man. They like fascism?  Suckers.

Sun, 03/18/2012 - 14:10 | 2267387 Flakmeister
Flakmeister's picture

Mix in a little theocracy with the corporatism/fascism and you have a real winner...

http://au.ibtimes.com/articles/314650/20120315/arizona-birth-control-bill-fire-women-religious.htm

Sun, 03/18/2012 - 12:20 | 2267160 Irish66
Irish66's picture

Bill Moyers interview this morning is very good.  Citi merger w/ Travelers 

Sun, 03/18/2012 - 12:25 | 2267169 LookingWithAmazement
LookingWithAmazement's picture

Christine Lagarde is optimistic about the world economy. Is that Total Collapse gonna come anytime soon? Not? Boring world we live in.

BTW: Iraq is already exploring new transport roads in case of Iran shutting down the Hormuz Strait, which will then not be a serioues issue. Boring world we live in.

Sun, 03/18/2012 - 13:38 | 2267298 tickhound
tickhound's picture

Trade routes are being established all over the middle east, period.  Not because some rogue state decides to "do it in case,"  but because WE want it to happen. 

Dollar hegemony is being threatened.  Hence the encirclement of resources, the establishment of trade routes, and the control of the existing trade routes.

Syria's Mediterranean locale is what is important.  The safety of its citizens is the cattle feed fed to you.

Reading mainstream headlines creates a desired effect.  You're the desired effect.  Putz.

 

Mon, 03/19/2012 - 00:50 | 2268651 Bansters-in-my-...
Bansters-in-my- feces's picture

LWA...

Who lifted the lid on the toilet bowl and let you out,you piece of shit you.

Mon, 03/19/2012 - 00:58 | 2268658 Bansters-in-my-...
Bansters-in-my- feces's picture

 double post

Mon, 03/19/2012 - 00:59 | 2268659 Bansters-in-my-...
Bansters-in-my- feces's picture

ooops,tripple post

Sun, 03/18/2012 - 12:30 | 2267178 ArkansasAngie
ArkansasAngie's picture

Iran?

Got to authorise payments for higher fuel costs

Sun, 03/18/2012 - 12:57 | 2267218 digalert
digalert's picture

Bankster Occupation!!!

Sun, 03/18/2012 - 13:01 | 2267227 Snakeeyes
Snakeeyes's picture

Reocvering from a credit/housing bubble is murderous. China, Spain, UK and US are ALL recovering from the massive hangover.

http://confoundedinterest.wordpress.com/2012/03/18/housing-a-tale-of-four-countries-u-s-u-k-china-and-spain-bubbles-bursts-and-flatness/

Sun, 03/18/2012 - 13:03 | 2267230 swissaustrian
swissaustrian's picture

Not one word about DERIVATIVES. Not from the FED, not from Bloonberg, not even from ZH...

Sun, 03/18/2012 - 14:40 | 2267446 dannyboy
dannyboy's picture

I very rarely reply to trolls or morons, and even more rarely do I reply to a mixture of the two. But this comment for some reason irritated me more than most. Because you put ZH in the same sentance as bloomberg, and the fed. ZH is without a doubt one of the premier financial blogs on the internet and without them alot of finacial scandals would be swept under the rug and we would never know about them (infinite re-hypothecation through the City of London, extent of HFT's etc..). To say that ZH is hiding the fact of derivatives, and other types of trades is simply rediculous. Now I do think you actually have no idea what they are but we will leave that aside.

What I will do is though, put a few ZH articles from my saved folder of ZH talking about derivatives and other types of products. Then you can apologize to the ZH crew underneath my comment for your ignorance.

http://www.zerohedge.com/news/five-banks-account-96-250-trillion-outstanding-derivative-exposure-morgan-stanley-sitting-fx-de

http://www.zerohedge.com/news/presenting-kyle-bass-analysis-shortening-collateral-chains-or-gradual-evisceration-shadow-banki

http://www.zerohedge.com/article/otc-derivatives-dtcc-too-big-fail

http://www.zerohedge.com/article/fitch-financial-companies-hold-997-all-derivative-contracts

http://www.zerohedge.com/content/biggest-financial-company-you-have-never-heard

There are hundreds more, just use the search bar on the right hand side before you troll next time.

Sun, 03/18/2012 - 16:34 | 2267702 Tyler Durden
Tyler Durden's picture

Funny - there actually is a search function on this website.

Unfortunately, there is no function for "jump to conclusions if you are astoundingly lazy": our readers seem quite adept at that on their own.

$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months

Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

Sun, 03/18/2012 - 17:39 | 2267788 dannyboy
dannyboy's picture

You mean he has to actually go and do some work himself? Now what type of person are you Tyler, everything must be given on a silver plate (no silver manipulation pun intended) to the idiots these days.

Your forehead must be getting quite sore from that brick wall no?

Sun, 03/18/2012 - 17:51 | 2267828 ekm
ekm's picture

Mein Herr

You need to go for a confession. Placing Zerohedge at the same level as the Fed is a grave sin.

You have sinned. Go confess.

Sun, 03/18/2012 - 13:16 | 2267265 Miss Expectations
Miss Expectations's picture

Professor Bernanke grades using one hell of a curve...let me guess, it was a closed book test?

Sun, 03/18/2012 - 13:17 | 2267272 loveyajimbo
loveyajimbo's picture

If this is fascism... then why not put Dimon and Blankfein in a gulag somewhere (converted Andy Gump outhouse) and throw away the key... and nationalize all assets?  Let Ron Paul pick the other crooks that need to be put away... see ya, Ben, Gensler, Schapirio, Holder, etc, etc...

Sun, 03/18/2012 - 21:01 | 2268208 StychoKiller
StychoKiller's picture

But, if we put Holder in the pokey, how will (Mexican) Drug cartels get their assault rifles??

Sun, 03/18/2012 - 13:28 | 2267299 Albertarocks
Sun, 03/18/2012 - 13:38 | 2267319 Blue Horshoe Lo...
Blue Horshoe Loves Annacott Steel's picture

Is it just me or everyday brings some new BS about how everything's OK? Some new justification for believing things are "turning the corner".

It's like the boy who cried recovery or yelling recovery in a crowded movie theatre.  It's becoming sad.  

How long before, like the old Soviet Union, even the sheeple people ignore everything these idiots say?

Sun, 03/18/2012 - 13:47 | 2267336 Eireann go Brach
Eireann go Brach's picture

Just go on Facebook for 2 minutes and you will see how fucking stupid the general population is! As everyone is a self absorbed celebrity now where new news is old news in 2 hours, Ben could release that he fucks baby goats tomorrow but by Tuesday everyone has forgotten about it! Hence why Obama's marketing machine will ensure he wins with a landslide!

Sun, 03/18/2012 - 15:09 | 2267520 slewie the pi-rat
slewie the pi-rat's picture

these banksters sure know the tunes to play, don't they?

and how to orchestrate the media and the momos; paper begets paper+ and banksters' kids have new shoes, phones, cars, and charge accounts at the studentUnion

one zombieBamaBank raises ~$1 B in equity just by having the foresight to have the stock offering ready, no less

centralPlanning has its rewards, distributed according to the cabal's secret plans and wishes

some little restaurant ought to go with a menu around this:  benzelbubBrugers, pelosiShakes, taxpayerGravy, unionGrits, bakedPensions, hankyPancakes, MIC pie;  you can pay in cash or junk sulver coins @ melt, but any unfunded liablities at the register or consumer credit for tipping, and everything costs twice as much!  EAT ME!!!

Sun, 03/18/2012 - 18:02 | 2267831 ekm
ekm's picture

I took 2 weeks off from MSM at your recommendation.

It was worth it. I got to go back to it though, for entertainment purpose.

Sun, 03/18/2012 - 15:25 | 2267556 HungrySeagull
HungrySeagull's picture

Dig deeper into Regions around the South and there you will find mega churches and bloated loans for stuff that has yet to either be started or finished.

Hell one branch I know of is trying to lease out it's second floor.

Sun, 03/18/2012 - 16:02 | 2267632 Sleepless Knight
Sleepless Knight's picture

First it's lipstick, then comes perfume, then a nice wig, and finally to make the package attractive, a bottle of Jack Daniels in the deal. Put them all together could be love "after a fifth" sight.

Sun, 03/18/2012 - 16:59 | 2267741 alfred b.
alfred b.'s picture

 

  Smoke and mirrors, bot & paid for gov'ts, outlaw bankers, rigged markets and a self-serving federal reserve all of which are defended and protected by all sorts of institutions such as MSM, police, SEC, CFTC, CIA, TSA, FBI, army et al stand against the American population.

   You'd think that it would be the other way around....right????

  Buy physical gold and silver!

 

Sun, 03/18/2012 - 18:15 | 2267845 ekm
ekm's picture

Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Goldman, Sachs & Co.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. LLC

This is the list of american primary dealers copy/pasted from Fed website. The rest are non american.

- Bear Stearns bought up a lot of shit via leverage in order to avoid their holding's price to tank. It went excrement.

- Lehman bought up a lot of shit via leverage in order to avoid their holding's price to tank. It went excrement.

- MF Global bought up a lot of shit via leverage in order to avoid their holding's price to tank. It went excrement.

Who is the next out of the above list to go shit and deadline of collapse?

Since BAC has gained 100% in 11 weeks, some PD has bought up BAC via leverage.

I don't know if Merryl Lynch is allowed to buy BAC, but if they are, I vote that Merryll Lynch will be the next one to go excrement by getting stuffed with BAC that nobody wants. Time of Death: April 30th, 2012.

Any more betting?

Sun, 03/18/2012 - 22:25 | 2268389 xtop23
xtop23's picture

I would like to see the results of a stress test that includes interest rates spiking and the bond market imploding. It would be a much more realistic judge of how stable the banking sector is.

That would grenade their little recovery rather quickly.

They'd launch outright QE so fast you wouldnt believe it.

Sun, 03/18/2012 - 22:58 | 2268461 Westcoastliberal
Westcoastliberal's picture

Let's make them all mark to market and then see who's left standing.  Bet they'll all be DOA.

Sun, 03/18/2012 - 23:22 | 2268511 xtop23
xtop23's picture

 Asset implosion booyaaaah

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