By Pam Martens and Russ Martens: July 2, 2021 ~
Dennis Kelleher, Co-Founder, President and Chief Executive Officer of Better Markets
Dennis Kelleher, the co-founder, President and CEO of the nonpartisan Wall Street watchdog, Better Markets, has issued a scathing rebuke of the Federal Reserve’s so-called “stress tests” of the mega banks on Wall Street, calling them “toothless.”
Kelleher’s criticisms revolve around two key points. The Fed is preordaining the outcome of the tests by (1) pumping up the banks’ capital with financial handouts prior to the tests and (2) by removing key aspects of the stress tests that would negatively impact the outcome.
Kelleher writes that the Fed’s “unprecedented” support to financial markets and the economy since last March was $4 trillion and “has materially helped to bolster bank balance sheets and capital levels.” But Kelleher is overlooking the more than $9 trillion in cumulative repo loans that the Fed showered on the trading units of these mega Wall Street banks, at far below market interest rates, from September 17, 2019 through early July of 2020, the month that the Fed simply stopped reporting this handout to the Wall Street banks.
This is also how the Fed has ginned up the tests, writes Kelleher:
“Making matters worse, the stress test program has been seriously weakened under the Powell chairmanship by, among other things, the removal of two key components: the inclusion of dividend payouts and a growing balance sheet. If those factors were included, as they should have been, the banks would have had materially lower post-stress capital ratios.”
Kelleher says the Fed “trumpeted” the fact that all of the banks passed the stress tests to justify letting the banks launch a “flood of dividends and share buybacks likely to approach $200 billion and exceed bank earnings by as much as 167%.”
When banks are paying out more than they’re earning, it implies a “reduction in capital, making the banking system less safe,” Better Markets notes in a related five-page fact sheet. The fact sheet includes this warning for Powell:
“History may judge the Fed’s decisions to deregulate and weaken the stress tests as to allow such outsized, capital-depleting payouts to be as dangerous as many of the Fed’s actions were before the 2008 GFC [Global Financial Crisis], which made that financial crash much worse, if not inevitable, and all but guaranteed the need for taxpayers to bailout Wall Street’s biggest banks.”
This would not be the first time that the Wall Street mega banks paid out more in dividends and share buybacks than their net income. In fact, they’ve been doing it for years under the unwatchful eye of their captured regulator, the Fed.
Bloomberg News reporters Lisa Lee and Shahien Nasiripour broke the story in June of last year that Bank of America, Citigroup, JPMorgan Chase and Wells Fargo had, since 2017, spent more on dividends and share buybacks than they had earned. The reporters wrote:
“From the start of 2017 through March, the four banks cumulatively returned about $1.26 to shareholders for every $1 they reported in net income, according to data compiled by Bloomberg. Citigroup returned almost twice as much money to its stockholders as it earned, according to the data, which includes dividends on preferred shares. The banks declined to comment.”
According to an audit conducted by the Government Accountability Office (GAO), those four banks named above that are paying out more to shareholders than they are earning received the following amounts in cumulative secret loans from the Fed, at interest rates of almost zero, from 2007 to 2010: (See chart below.)
Citigroup $2.5 trillion
Bank of America $1.3 trillion
JPMorgan Chase $391 billion
Wells Fargo $159 billion
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