stress tests
Wells Fargo should have failed the stress test
March 19, 2013: 11:45 AM ETFederal Reserve officials dinged JPMorgan and Goldman for being off on their stress test results. Wells Fargo, however, got a pass.
Wells Fargo CEO John Stumpf
FORTUNE -- It pays to be the teacher's pet, even when you are bad at sucking up.
Shortly after the Federal Reserve released the results of its recent stress test last week, Wells Fargo said in its own report that it had no idea how the Fed came up with its numbers.
That's an understatement.
Wells (WFC) said it would lose $1.7 billion in a severe economic downturn. The Fed's loss estimate under the same scenario was more than 12 times that: Nearly $26 billion. Of the 18 banks that took the Fed's stress test, only one, JPMorgan Chase, missed the Fed's estimate by a wider margin. After Wells, Goldman Sachs did the next worse at matching the Fed's results. It was off by a mere $14 billion.
MORE: Is Goldman riskier than it says?
However, unlike JPMorgan (JPM) and Goldman (GS), Wells was given an unconditional passing grade on the Fed's test -- the best grade possible. JPMorgan and Goldman, on the other hand, were told they would have to take the test again. It's not clear why.
The test was supposed to be about whether banks had enough capital -- that is the money a bank has to cover bad loans and investments -- to survive another financial crisis. Wells was deemed to have enough. But so were JPMorgan and Goldman.
Nonetheless, a senior Fed official hinted that the central bank was unhappy with the numbers that JPMorgan and Goldman submitted on its test results. They were too rosy. That seems to be the reason that the Fed is forcing JPMorgan and Goldman to resubmit their capital plans.
It's not clear why Wells isn't being forced to do the same. Fed officials declined to comment. A Wells spokeswoman said the bank was pleased with the results and declined to comment further. Says one veteran bank analyst, "Made no sense to us."
It appears all of the banks tried to lowball regulators on the recent stress test. But Wells Fargo's pitch was the furthest outside the Fed's strike zone. The bank said $32 billion of its loans would go bad in a downturn. The Fed said Wells would have to swallow nearly $54 billion in losses. And some analysts said they thought even that estimate was low. Goldman analyst Richard Ramsden put Wells Fargo's potential loan losses at $58 billion.
MORE: Why higher mortgage rates could boost the housing market
"Even the Fed's numbers in a crisis like the one we had were probably low," says bank analyst Paul Miller of FBR Capital Markets. "Wells has always been an optimistic bank."
Lawyers and other consultants who help banks with regulatory matters say the Fed, in the wake of the London Whale, has become overly cautious about banks that are risking their money in the market. JPMorgan and Goldman have large trading operations. Wells doesn't. And that's why Wells may have gotten the full pass, and its two rivals didn't.
Anat Admati, in her new book The Bankers' New Clothes, which is about how to make banks safer and has been been getting a lot of buzz in policy circles, says the emphasis is misplaced. Traditionally, banks imploded because of bad loans. That was the case in the last financial crisis. If anything, the trading operations at JPMorgan and Goldman made them safer in the downturn. So while she's not against it, Admati thinks the Volcker rule and other efforts like it to crack down on the banks' trading arms misses the point. The same could be said of the stress test.
So for now, Wells Fargo remains the regulator's favorite big bank. That's probably what the stress test really told us, not that it was actually any safer.
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Fed approves capital plans from 16 of 18 big banks
Goldman Sachs and JPMorgan get the go-ahead from the Federal Reserve for their capital plans - but with conditions.
Correction: March 15, 3:55 PM.
FORTUNE -- The Federal Reserve approved the capital plans of 16 of the nation's 18 largest banks on Thursday as part of the final leg of their required stress tests.
Ally Financial, the former finance arm of General Motors (GM), and BB&T (BBT), a regional bank based in Winston-Salem, MORE
Stephen Gandel, senior editor - Mar 14, 2013 6:49 PM ET -
Is Goldman Sachs riskier than it says?
The Federal Reserve bank stress test suggests a Goldman risk measure may be misleading.
FORTUNE -- In the last year or so, Goldman Sachs executives have tried to portray their firm, often seen as a Wall Street swashbuckler, as a lot less risky than it used to be. The Federal Reserve appears not to be convinced.
We'll get a better idea of what the Fed thinks on Thursday after the market closes, MORE
Stephen Gandel, senior editor - Mar 14, 2013 5:00 AM ET -
Stress test results: Banks could lose nearly half a trillion dollars
Federal Reserve says 17 of the nation's 18 largest banks could survive a severe economic meltdown.
FORTUNE -- In its annual stress test of the nation's largest banks, the Federal Reserve estimated that these firms would lose $462 billion dollars if the economy were to enter another recession similar to the one we just had.
Despite those losses, though, the Fed says nearly all of these banks would survive.
Of the 18 banks MORE
Stephen Gandel, senior editor - Mar 7, 2013 4:32 PM ET -
Ben Bernanke is just doing his job, folks
Love them or hate them, the Fed crew are the rare breed in Washington that aren't just looking out for Number One.
FORTUNE -- We have an unfortunate tendency in this country to treat people as either heroes or villains, with no gradations in between. Take Fed chairman Ben Bernanke. He's being called exceptionally vicious names by right-wing types for supposedly undermining our currency and planting the seeds for future inflation -- MORE
Allan Sloan, senior editor-at-large - Mar 21, 2012 5:00 AM ETPosted in: aig, Allan Sloan, Ben Bernanke, Federal Reserve, interest rates, Macro, mortgage crisis, stress tests -
Where the stress tests failed
The Fed's test proved the banks could survive another downturn, as long as the next downturn looks like the last.
FORTUNE -- Nearly three years ago I wrote a story saying the Federal Reserve should make bank "stress tests" an annual event. Now that it seems they have, I am not sure how wise my advice was.
On Tuesday, the Fed said that the nation's largest banks would be able to weather MORE
Stephen Gandel, senior editor - Mar 14, 2012 10:53 AM ET -
Stress tests may shed light on Wall Street's 'mark-to-make-believe' accounting
Banks are still using the just trust us method to value hundreds of billions of dollars of assets left over from the financial crisis.
FORTUNE -- The stress tests, which are expected to be released by the Federal Reserve next week, will likely show that banks are better prepared for a financial crisis than they were three years ago. The tests are also likely to show the banks haven't abandoned the MORE
Stephen Gandel, senior editor - Mar 5, 2012 11:27 AM ET -
Germany's bleating bankers
As a thrifty export powerhouse, Germany often puts the United States to economic shame.
But don't despair: its bankers are every bit as irresponsible and politically powerful as ours.
That's why German banks and their supposed masters are lobbying the European Banking Authority to weaken the stress tests that are due out in coming months. Their sauerbraten is that the EBA is trying to make banks hold higher-quality capital to ensure that shareholders, rather than taxpayers, MORE
Colin Barr - Jun 6, 2011 2:52 PM ET -
Fed foils BofA dividend dash
It's back to the drawing board for Bank of America.
BofA (BAC) said Wednesday the Federal Reserve "indicated that it objected" to the bank's plan to raise its dividend in the second half of 2011. The decision clearly surprised the bank, whose CEO Brian Moynihan has been saying the biggest U.S. bank by assets expected to boost payouts along with most of the other big banks.
BofA didn't say specifically what the MORE
Colin Barr - Mar 23, 2011 9:43 AM ET -
European regulators defend stress tests
Bank regulators pushed back at a press report that roiled financial markets Tuesday.
The Committee of European Bank Supervisors, the group that conducted and publicized the stress tests on 91 big European banks in July, issued a statement Wednesday defending its handling of data on banks' exposure to sovereign debt issued by stressed governments.
CEBS said the tests sought to provide "a meaningful and consistent view of banks exposures to sovereign debt." MORE
Colin Barr - Sep 8, 2010 11:26 AM ET
