Monday, March 2, 2015


On the surface, it looks as though nothing is going on.  Not the case.  On Thursday, the Fed will release the abbreviated results of their latest stress tests and if reports are correct, a couple of banks are going to be on the hot seat whose nationality may result in even greater worries.

The banks are Deutsche and Santander and I will not even attempt to delve into what's wrong (if anything) or the methodology as to how the Fed decides if there is anything wrong.  I haven't a clue and neither does anyone else.  In fact, I'm not sure that the Fed is in complete agreement as to what or how this should be approached.

You might remember that last year Citigroup failed the stress test.  Now say what you want about this bunch, one thing they are not is stupid.  Nor were/are they not attuned to the importance of the stress test because without a passing grade they are in limbo in an attempt to execute a corporate strategy as is their stock price.  I don't think I'm telling tales out of school because everyone know by now what happened but last year they thought they had it made.  They were working hand in glove with their overseers from the N.Y. Fed only to be told at the last minute that they had failed.  The meeting at which this occurred was considered so pro forma that the CEO was out of the country.  It seems that having followed the rules laid out by their regulator they were told that those rules were not those of the regulator's bosses...the Federal Reserve in Washington.  Needless to say, despite his guys being crapped on and made to look like fools, Billy the Dud folded like a cardboard box.

I shall resist commenting further other than to point out that the guy in charge in D.C. is Danny Tarullo, the shill for Crazy Lizzy who desperately wants a scalp, shareholder's best interests be damned.  It is also important to keep in mind that neither of them are too happy with either Deutsche or Santander and have said so publicly so one can expect the worst come Thursday.

Now there are some really questionable things that have swirled around these two institutions for quite a while but putting the hurt to a couple of banks that are owned elsewhere is a different thing than beating all over Citigroup despite it's size.  Whatever the outcome, it seems to me that it would be in everyone's best interest that this time around the Fed make it perfectly clear what the ground rules are and the methodology used to evaluate the same.  No normal person will understand them but those with doctorates from MIT or Cal Tech will get to the bottom of this and explain it to us in due course.  Now, if they don't do it that way, I suspect that the folks in Euroland might get a touch upset.  These are not insignificant institution; the last thing we need at this stage is a--pardon the phrase--pissing contest among regulators.  And for all concerned, the methodology had better make sense...not just because they don't wind up looking like--or not like--that wonderful Savings and Loan, Wells Fargo, with whom both Danny and Lizzy seem to be having an affair.

Speaking of Wells, they today announced that they were cutting back on their sub-prime lending to no more than 10% of their portfolio.  Now that's a more important announcement I think that the attention it received because Wells' sub-prime activities were heavily weighted towards auto lending and that piece of the economy has been one of the best performing over the past couple of years.  A lot of the success has been based upon the huge availability of financing despite credit ratings.  Interestingly enough, this business is also one of the strengths of Santander.  Connection?  Nah, but a fun juxtaposition.  Finally, do not forget that Citi is also awaiting the results of it's stress test.  They need a "pass" on this one badly...really badly.  As regular reader know, I think the guys running the place have done simply a fabulous job over the past few years, so I wish them luck.

Finally, in the week that will be, the future of Greece will become--perhaps--more clear.  A lot of folks in the government were speaking out over the past few days and a lot of dumb things were being said.  Hopefully, that will change except that I'm not sure if I would listen to those reported to be giving the government advice.  Zealotry without skin in the game is easy; it gets harder when your country's future is at stake.

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