Goldman, Jpmorgan overvaluing capital strength:
Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley lagged behind peers in a key measure of capital strength used by US regulators to stress-test their resiliency in a severe recession.
The three firms submitted moreoptimistic estimates of their capital strength and ability to avoid losses on trading and lending than Federal Reserve projections released Friday for the 18 biggest US banks. Of the three, the gap was widest for Goldman Sachs, which predicted that its Tier 1 common ratio may fall as low as 8.6 percent in a sharp economic downturn, compared with the central bank’s 5.8 percent estimate.
JPMorgan, the biggest US bank, projected that its key capital ratio wouldn’t fall below 7.6 percent, compared with 6.3 percent estimated by the central bank.
Chief Executive Officer Jamie Dimon said this year JPMorgan scaled back its $15 billion share buyback program by at least 20 percent and hopes to boost the bank’s 30-cent quarterly dividend.
Morgan Stanley CFO Ruth Porat said in January that her firm only requested approval for buying the remaining 35 percent of its brokerage venture from Citigroup Inc.
The disparities — including a gap of 1.3 percentage points for JPMorgan — raise the risk that some banks may have been too aggressive while seeking Fed approval to distribute capital to investors through dividends and share repurchases. The companies must maintain Tier 1 common ratios of at least 5 percent under their capital plans. The Fed is set to release the results of those requests next week. “If you came in with rosier assumptions than the Fed’s own baseline, then you’re definitely at risk of failure” in the capital request, said Christopher Whalen, executive vice president at Carrington Investment Services LLC. “The Fed is going to push back on those banks.” Spokesmen for JPMorgan, Goldman Sachs and Morgan Stanley, all based in New York, declined to comment.
Auto lender Ally Financial Inc had a capital ratio of 1.5 percent, the lowest of the firms tested. Detroitbased Ally, which is majority owned by the U.S., disputed the Fed’s results, calling the analysis “inconsistent with historical experience” and “fundamentally flawed.”
The results are a prelude to the Fed’s capital-plan review of the same banks scheduled for release on March 14. Yesterday’s results don’t forecast next week’s because the first test excludes management’s plans, a Fed official said Friday on a conference call with reporters. Banks have said they were coming into this year’s process more cautious even as investors of the six biggest US lenders were anticipating capital payouts that could total $41 billion. Goldman Sachs Chief Financial Officer Harvey Schwartz told analysts in January that the firm works closely with regulators to ensure it has a “conservative capital plan.” JPMorgan scaled back its $15 billion share buyback program by at least 20 percent and hopes to boost the bank’s 30-cent quarterly dividend, Chief Executive Officer Jamie Dimon said this year.
Morgan Stanley CFO Ruth Porat said in January that her firm only requested approval for buying the remaining 35 percent of its brokerage venture from Citigroup Inc. Not asking for a lot won’t help lenders if the assumptions they use aren’t appropriately cautious, said Richard Bove, a bank analyst with Rafferty Capital