Counterparties: Ending capital punishment

By Ben Walsh
March 6, 2013

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Apple may want to keep its capital, but big US banks want to return some of theirs. Tomorrow the Fed will release the first set of data from its stress tests. Bank execs will have to wait until next week to find out whether they’ll finally be allowed to return more capital to shareholders.

Bloomberg’s Dakin Campbell and Hugh Son write that US banks may return $41 billion to investors over the next year, using the average of estimates from research analysts at Barclays, Credit Suisse, and Morgan Stanley. As David Benoit notes, this is a turnaround from last year, when Bank of America and Citi were forced to keep their payouts at a pro forma cent a share.

Bank earnings rose 20% in 2012 and executives want to hand capital to shareholders, even if, as Benoit writes, they’re unlikely to return enough to drive major moves in bank stocks. Before they can do so, big banks must pass the Fed’s stress tests, which simulate two scenarios. Scenario 1 is six consecutive quarters of economic contraction with rising interest rates; Scenario 2 is 13% unemployment combined with a 52% fall in the stock market.

Jesse Eisinger thinks Bank of America, for one, is being overoptimistic with respect to the amount of capital it’s showing regulators. He says that the bank has low-balled the amount money it has set aside to pay future legal settlements, despite continuing to face lawsuits related to its ill-fated acquisition of Countrywide.

Banks have traditionally paid, and their investors have expected, healthy dividends. But since the financial crisis, that hasn’t always been the case. The rest of the stock market is showering shareholders with unprecedented amounts of cash: as Cardiff Garcia points out, February was a record month for share buybacks. So far, however, non-financials have led the way. Because of the realities of post-crisis regulation, banks have to wait before finding out whether they’ll get to join the party. — Ben Walsh

On to today’s links:

Popular Myths
America is actually terrible at globalization – Tim Fernholz

Alpha
Once again, the media is asking all the wrong questions about the stock market – Josh Brown
What Warren Buffett’s worst year says about his skill – FT

Punditry
World’s wrongest man ventures latest prediction about the economy – Jonathan Chait

Austerity Bites
The eurozone will probably shrink again in 2013 – Reuters

New Normal
Low-income students’ college completion rate is 6 times lower than high-income students’ – Bloomberg
A college degree is still the best indicator of employment for the young – Catherine Rampell

TBTF
Citigroup explores the novel idea of measuring employee performance using data – Jonathan Weil
Michael Corbat: “You are what you measure” – WSJ
The US attorney general is worried that America’s banks are too big to prosecute – The Hill

Servicey
Shorts, and 9 other health supplements you actually need – Hamilton Nolan

This Is Actually Happening
China is upset that Japan is keeping its currency artificially low – WSJ

Oxpeckers
Absurd Business Insider headlines subreddit – Reddit
Ta-Nehisi Coates: the job of a writer is “being ignorant and learning” – NY Observer

Regulations
EU fines Microsoft $731 million for making Europe use the terrible Internet Explorer – Reuters

Ouch
Bill Gates takes to his blog to slam a popular book on economic development – The Gates Notes

Troubling
Stock market leverage is nearing 2007 levels – Finalternatives

Hegemons
“China has established a hydro-supremacy unparalleled on any continent” – Brahma Chellaney

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