The FED's Sham "Stress Tests" Greenlight Wall Street to Loot Reserves as Recession Looms
Even Blackstone-owned, FED-mouthpiece Reuters called the tests "STRESSLESS"
Huzzah! The FED apparatchiks ran Wall Street’s numbers - numbers that are trusted blindly - through a series of contrived “severe” scenarios. And on Thursday the FED proclaimed that the megabanks passed their annual “stress tests” with flying colors. We should all take great comfort, right?
Well, anyone who is watching closely doesn’t put much stock in the FED’s rosy outlook, which was quickly spewed as headline propaganda across corporate media. Indeed, the stress tests, mandated by Dodd-Frank, have become “toothless” exercises that are designed to provide “cover for Wall Street’s biggest banks stock buybacks.” At least, so said industry “watchdog” Better Markets last year, which issued a scathing rebuke of the sham “stress” test:
“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.”
So, what’d the FED gin up this year? The FED claims that the “test shows that large banks have sufficient capital to absorb more than $600 billion in losses and continue lending to households and businesses under stressful conditions.” Specifically, under a “severely adverse scenario” — that is a fiction entirely made up by the FED, bank losses total $612 billion.
That’s a lot of money (albeit less than 7% of the FED’s monstrous ~$9 trillion balance sheet). But is it really a severely adverse scenario? Well, McKinsey estimated that US bank loan losses alone coming out of the COVID pandemic could be more than double the amount that the FED stress tested ($1 trillion vs. $463 billion).
All of the sudden, the FED’s “stress test” doesn’t sound very stressful, does it? Reuters, which is owned by Blackstone and generally acts as a FED mouthpiece, even claimed that banks may have “sailed through their last stress-free stress tests.” They suggested the next FED Vice Chair for Supervision will likely resurrect more stringent pass-fail tests of the banks’ risk controls that were scrapped. (A dubious assertion if Geithner-disciple Michael Barr is confirmed in that role).
“Annual stress tests were once a thorn in Wall Street banks' side. As well as having to pass quantitative reviews, they could fail due to qualitative problems like shaky risk management. That limited dividends and share buybacks for gaffe-prone banks like Citigroup. Under former Vice Chair of Supervision Randal Quarles [a close friend of Jay Powell], the pass-fail aspect was scrapped, however.”
But perhaps the biggest problem with the stress tests is that Wall Street knows exactly how to game the system, and the FED doesn’t give a shit. Wall Street on Parade covered the problem back in 2020 — the FED itself released a bombshell report effectively acknowledging it. Wall Street megabanks regularly drop their levels of derivatives in Q4 to make their exposure appear less for the stress tests and then ramp that exposure right back up in Q1.
Surprise, surprise. Wall Street megabank JP Morgan just massively increased its book of risky, opaque and potentially toxic derivatives in Q1. And the very same megabanks with massive derivative exposure are the ones that required a $48 TRILLION repo loan bailout program in 2019-2020 (starting long before COVID ever his the shores of America). Yes, we said $48 TRILLION (see Don't Read This Post: Wall Street Wants to Keep the Fed's Illicit $48 Trillion Repo Bailout Secret).
Warren Buffett once famously stated that “derivatives are weapons of mass destruction, carrying dangers that, while now latent, could be potentially lethal.” Don’t you think the FED should be factoring accurate levels of derivatives exposure into its stress tests? And why doesn’t the FED seem to want stringent tests given the outsized risk?
The answer is that passing the test is the threshold requirement for banks to engage in massive stock buybacks and dividends. And the FED wants their cronies on Wall Street to be able to lavish shareholders with rewards that far outpace the banks’ own revenues, placing reserves at risk. So too with Wall Street executive bonuses — which were the largest in American history last year. Executive pay was SUPPOSED to be addressed by Dodd Frank years ago, but it was scrapped by the Trump administration. And now the Biden administration has dragged its feet, giving the all clear for the Powell Fed to delay things further.
Meanwhile, the Main Street economy teeters on the edge of a recession. Indeed, the Atlanta Fed’s GDPNow model stands at precisely 0.0 percent. JP Morgan’s CEO Jamie Dimon, who has received historically massive bonuses himself, said recently to “brace yourself” for an “economic hurricane.” Senator Sherrod Brown, who heads the Senate Banking Committee that oversees the FED, had this to say:
“It is past time for the Fed to implement rigorous stress tests and strong capital requirements. Wall Street bank CEOs have raised the alarm bells that an economic hurricane is coming, but the reality is that the largest banks aren’t doing what they need to do to protect the economy from the next crisis. Instead of building up capital to withstand losses or investing in the real economy and workers, they’re planning to spend $80 billion in stock buybacks and dividends. Taxpayers shouldn’t be left holding the bag for Wall Street CEOs who put profits over working families.”
All good points. Except Senator Brown is the very same man who just helped ram through the reinstallation of former Wall Street lawyer, private equity vulture and centimillionaire Jay Powell as Fed Chair. At the time, Brown said: “I look forward to working with Powell to stand up to Wall Street and stand up for workers, so that they share in the prosperity they create.” ROFL. Powell stand up to Wall Street?! What a load of horse excrement.
Tucked away behind the exuberant headlines is the fact that several of the worst performing Wall Street megabanks actually didn’t perform quite as well as expected. CNBC reports (behind a paywall) that “JPMorgan, Bank of America and Citigroup may need to cut buybacks after Fed stress test results.” So will the banks cut buybacks and bonuses to protect reserves — reserves which the FED hasn’t required since the start of the pandemic? Or will they again effectively pay themselves and their shareholders with hardworking Americans’ bank deposits and then look for a bailout when it all falls apart? We think you know the answer by now.
It’s all just a dog and pony show until we make it clear to the FED and Congress that America knows exactly what they’re doing and won’t put up with it anymore.
We’ll keep exposing these scumbags and trying to help give a voice to the American middle and working class. We get paid nothing to do this work - we literally just want to help our fellow Americans and make America a better, more egalitarian place for our children. All we ask is that you help spread the word.
What if I told you inflation is really 16.8% 👀 Keep going. Do not give up. Keep digging. Keep exposing. This is truly honorable work. Pass it along to everyone you know. Thank you thank you thank you 🙏🏻
Good article as usual. The Street is well aware that despite all of JPOW’s huffing and puffing, the projected peak Fed rate of 3.5% is pitifully low given 8.6% inflation and the tiny reduction in the $9 trillion balance sheet will hardly move the needle. Your coverage of the continuing massive Fed purchases of Treasuries and MBS is a great public service. The media isn’t covering that at all. Even though the the Street (1%) are focused on it like a hawk, it was never done before the financial crisis, and it feeds the rich and buries the poor with massive inflation.