After Market Close Yesterday, the Fed Approved Mega Buybacks for Banks

[sailingaway]

I guess it's us really paying for this through the quantitative easing.

http://www.forbes.com/sites/greatspeculations/2013/03/15/buybacks-unchained-saddling-up-for-bank-of-americas-next-big-run/


Yesterday after the market close, the Federal Reserve announced the results of Comprehensive Capital Analysis and Review (CCAR). In CCAR, the Fed evaluates capital ratios under distressed financial and economic conditions, the plan to comply with Basel 3 capital requirements, and the capital planning process.

The Fed approved capital plans of 14 firms including Bank of America, Citigroup, and Morgan Stanley. Goldman Sachs and JPMorgan Chase received conditional approvals.

The big surprise was approval of Bank of America’s plan to repurchase up to $5 billion of common stock and to redeem about $5.5 billion of preferred stock. These amounts exceeded expectations. The market reacted favorably. In after-hours the stock was up about 4%, and pre-market Friday it is up 3.8% to $12.57.

“We have simplified our company and we have more than adequate capital to support our strategic plans. We are well positioned to return excess capital to our shareholders,” said Chief Executive Officer Brian Moynihan. “We believe buying back common shares is the best way to continue to drive value for our shareholders.”

It is important to note that the book value of Bank of America is $20.24. The stock trades at approximately 60% of book value. In comparison, JPMorgan’s stock price is approaching its book value. Of course, JPMorgan is a much stronger company and does not carry the mortgage related baggage that Bank of America carries from its acquisition of Countrywide Financial. Herein lies the opportunity. The housing market is getting better. CCAR assumes severe distress in housing conditions and now due to courtesy of the Fed, we know that Bank of America can survive such circumstances with flying colors.

meanwhile, Tiabbi is live blogging the Senate investigative hearing on Goldman Sachs - I haven't checked it yet, but I posted the link in another thread.

[Zippyjuan]

Banks had been prohibited from making stock buy-backs so they would have the cash on hand in case they had to face some financial emergency. The Fed determined that some banks have improved their balance sheets enough to allow them to buy back more of their own shares. (buying back shares reduces the supply and raises the price of the shares- companies may do this to either drive up their share prices and encourage others to buy more shares or they simlply have tons of extra cash and don't know what to do with it.

[sailingaway]

Banks had been prohibited from making stock buy-backs so they would have the cash on hand in case they had to face some financial emergency. The Fed determined that some banks have improved their balance sheets enough to allow them to buy back more of their own shares. (buying back shares reduces the supply and raises the price of the shares- companies may do this to either drive up their share prices and encourage others to buy more shares or they simlply have tons of extra cash and don't know what to do with it.

Yeah, they improved their balance sheets by keeping the funds and buying treasuries or getting other interest getting free money at the difference between the free money loan from the fed and the treasury rate, with taxpayers funding both sides of the deal.

[Zippyjuan]

Where are they getting the free money loans? Borrowing from the Fed has been basically zero- less than half a billion dollars outstanding as of February 2013.
http://research.stlouisfed.org/fred2/series/DISCBORR


2013-02: 0.465 Billions of Dollars
Monthly, Not Seasonally Adjusted,


http://research.stlouisfed.org/fred2/data/DISCBORR_Max_630_378.png

[sailingaway]

Where are they getting the free money loans? Borrowing from the Fed has been basically zero- less than half a billion dollars outstanding as of February 2013.
http://research.stlouisfed.org/fred2/series/DISCBORR


http://research.stlouisfed.org/fred2/data/DISCBORR_Max_630_378.png


They got it before February. Come on, where do YOU think they 'improved their balance sheets'?

[Zippyjuan]

So let's look at the last five months. Same link.

2013-02: 0.465 Billions of Dollars

2013-01: 0.565

2012-12: 0.795

2012-11: 1.051

2012-10: 1.466

Here is five years- basically nothing since 2011 (the spike in 2008 was the bailouts- it has been declining since then as those loans have been paid off- AIG was the largest borrower):
http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=DISCBORR&scale=Left&range=5yrs&cosd=2008-02-01&coed=2013-02-01&line_color=%230000ff&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&fq=Monthly&fam=avg&fgst=lin&transformation=lin&vintage_date=2013-03-15&revision_date=2013-03-15

[sailingaway]

See that huge spike in 2009? Obviously they didn't loan it out to start ups.

[acptulsa]

Where are they getting the free money loans? Borrowing from the Fed has been basically zero- less than half a billion dollars outstanding as of February 2013.
http://research.stlouisfed.org/fred2/series/DISCBORR



http://research.stlouisfed.org/fred2/data/DISCBORR_Max_630_378.png

Um, Zippy--that's not a chart of debt outstanding. That's a chart of borrowing. Just because they've cut down their borrowing doesn't mean they don't owe.

[MoneyWhereMyMouthIs2]

See that huge spike in 2009? Obviously they didn't loan it out to start ups.


"Shaded areas indicate US recessions."

LMAO

So we've been flying high since mid 2009.

[Zippyjuan]

Discount Window loans are very short term- usually overnight. If they need the money longer, it is typically rolled over into a new loan. Yes, they have been paying them back.
http://www.bloomberg.com/news/2012-06-14/new-york-fed-says-aig-bear-stearns-rescue-loans-fully-repaid.html



Federal Reserve Says AIG, Bear Stearns Rescue Loans Paid

By Jody Shenn & Zachary Tracer - Jun 14, 2012 1:59 PM PT

Another chart showing the same thing basically: Total Borrowings of Depositor Institutions From the Federal Reserve
This shows how much money is currently loaned out.

Total amount outstanding:

2013-02: 0.465 Billions of Dollars

Hmm. Same figure. Yep.
Five Year version of the chart- slightly different shape but same basically zero money currently out or being kept out:
http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=BORROW&scale=Left&range=5yrs&cosd=2008-02-01&coed=2013-02-01&line_color=%230000ff&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&fq=Monthly&fam=avg&fgst=lin&transformation=lin&vintage_date=2013-03-15&revision_date=2013-03-15
http://research.stlouisfed.org/fred2/series/BORROW?rid=19&soid=1

[Zippyjuan]

"Shaded areas indicate US recessions."

LMAO

So we've been flying high since mid 2009.

Recession Ending simply means when things stopped getting worse (they stopped receeding). Doesn't mean things are back to Happy Days.

[The Gold Standard]

They are borrowing it from each other. Pyramiding off of this:

http://research.stlouisfed.org/fred2/data/BASE_Max_630_378.png

[Zippyjuan]

You do realize what is in the Monetary Base? That is the cash in circulation plus excess reserves the banks have at the Federal Reserve. If the money is at the Fed, they are not loaning it to each other at zero interest and buying things like Treasuries.

From where you got your chart (printed right below it):

http://research.stlouisfed.org/fred2/series/BASE/

The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. These data are adjusted for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories.

If they are using Monetary Base to buy investments, the Base should be going down. Is it? Doesn't look like it is.

[HOLLYWOOD]

THE FED... ALSO allowed themselves (banks) to raise their stock dividends... this whole banking bullshit is a Mafia Felony RICO.

Round 2 of the FED banking stress test is complete... under their scenarios of a market dropping ~50%, property values declining ~25-50%... greater debt ...don't think for one split second that these bankstas won't be bailed-out again by their fucking political Beeatches inside the DC beltway.

How's that lost $1.2 Billion jerk off Jon Corzine and MF Global doing out there?
Stroke some more by the LIBOR gang fraud?
JP Morgan Chase Manhattan Bank One Bear Stearns Great Western Providian Washington Mutual +EBT creditor BORG... doing with their "REFORMULATED" CIO investments losses?
Where's that Wall Street insider shill that chaired the SEC? You know, Mary Shapiro, oh, that's right, only took a few days off the job to jump on Jefferey Immelt's GE MIC bailed-out bandwagon.

[The Gold Standard]

You do realize what is in the Monetary Base? That is the cash in circulation plus excess reserves the banks have at the Federal Reserve. If the money is at the Fed, they are not loaning it to each other at zero interest and buying things like Treasuries.

From where you got your chart (printed right below it):

http://research.stlouisfed.org/fred2/series/BASE/


If they are using Monetary Base to buy investments, the Base should be going down. Is it? Doesn't look like it is.

Don't play dumb, your boss knows how it works.


plus deposits held by depository institutions at Federal Reserve Banks

What do banks do with deposits? Look at them? Eat them? Or lend out 90% of them, which are then deposited at another Federal Reserve bank, loaned out again, and so on?

[Mini-Me]

I think the people referring to zero interest loans are largely forgetting where the banks REALLY got all their recent reserves: Not through loans from the Fed, but through purchases from the Fed called quantitative easing. They permanently sold off a whole bunch of toxic assets (MBS's, etc.) to the Federal Reserve for bundles of newly "printed" reserves, straight from thin air...several times. With the exception of the recent QE programs, the majority of the monetary base over time has come from the Fed purchasing a large number of US Treasuries, mostly [if not entirely?] through intermediaries. You can basically see what contributed to the monetary base by taking a look at the composition of the Federal Reserve's balance sheet.

There's something confusing about how everything's counted though: The bank reserves and vault cash from the monetary base (MB) are not included in other measures like M1, M2, M3, etc. (the cash in circulation is though). This makes sense in a way, because some of the money would be "double-counted" if that were the case. Unfortunately, MB doesn't serve as a measure of the monetary base that created the current money supply either; rather, it primarily serves as a measure of the additional monetary base that can be (but has not yet been) leveraged to increase the current money supply further (...and multiply it by 10 or so to see what its full impact might become, not counting derivatives and such ;)). Even that's not strictly accurate though, since it does include cash already in circulation...quite confusing. Anyway, assuming the charts are made with this understanding, Zippy is correct when he says that the monetary base charts show [primarily] the bank reserves and vault cash that have not been lent out to contribute to the money supply in circulation.

EDIT: (Oops, I made a mistake here...fixed now.) If you want to know the amount of monetary base that led to the current money supply (M1/M2/M3), you're going to have to dig a bit more. There SHOULD be a measure of this, but there doesn't seem to be. Even M1 already includes demand deposits, so it already factors in the money multiplier effect to a large degree. Really, it seems like an important and telling measure (what amount of "former" monetary base actually became the base of the current money supply) is entirely unaccounted for by the basic M-levels. You might be able to get a rough measure by subtracting the amount of monetary base (MB) from the size of the Fed's balance sheet, but I'm sure there's something I'm not accounting for.

[Zippyjuan]

Don't play dumb, your boss knows how it works.



What do banks do with deposits? Look at them? Eat them? Or lend out 90% of them, which are then deposited at another Federal Reserve bank, loaned out again, and so on?

That is money on deposit at the Federal Reserve. Just like if you have a deposit at your bank you no longer have that cash at home to lend out to somebody- if the money is at the Fed it isn't in their vaults to lend out. You would have to take it out of the bank first. There are twelve Federal Reserve branches.

[Zippyjuan]

I think the people referring to zero interest loans are largely forgetting where the banks REALLY got all their recent reserves: Not through loans from the Fed, but through purchases from the Fed called quantitative easing. They permanently sold off a whole bunch of toxic assets (MBS's, etc.) to the Federal Reserve for bundles of newly "printed" reserves, straight from thin air...several times. With the exception of the recent QE programs, the majority of the monetary base over time has come from the Fed purchasing a large number of US Treasuries, mostly [if not entirely?] through intermediaries. You can basically see what contributed to the monetary base by taking a look at the composition of the Federal Reserve's balance sheet.

There's something confusing about how everything's counted though: The bank reserves and vault cash from the monetary base (MB) are not included in other measures like M1, M2, M3, etc. (the cash in circulation is though). This makes sense in a way, because some of the money would be "double-counted" if that were the case. Unfortunately, MB doesn't serve as a measure of the monetary base that created the current money supply either; rather, it primarily serves as a measure of the additional monetary base that can be (but has not yet been) leveraged to increase the current money supply further (...and multiply it by 10 or so to see what its full impact might become, not counting derivatives and such ;)). Even that's not strictly accurate though, since it does include cash already in circulation...quite confusing. Anyway, assuming the charts are made with this understanding, Zippy is correct when he says that the monetary base charts show [primarily] the bank reserves and vault cash that have not been lent out to contribute to the money supply in circulation.

EDIT: (Oops, I made a mistake here...fixed now.) If you want to know the amount of monetary base that led to the current money supply (M1/M2/M3), you're going to have to dig a bit more. There SHOULD be a measure of this, but there doesn't seem to be. Even M1 already includes demand deposits, so it already factors in the money multiplier effect to a large degree. Really, it seems like an important and telling measure (what amount of "former" monetary base actually became the base of the current money supply) is entirely unaccounted for by the basic M-levels. You might be able to get a rough measure by subtracting the amount of monetary base (MB) from the size of the Fed's balance sheet, but I'm sure there's something I'm not accounting for.

M0 would give you cash. Here is a chart of the Currency Component of M1- currently $1.1 trillion:
http://research.stlouisfed.org/fred2/series/CURRENCY
http://research.stlouisfed.org/fred2/data/CURRENCY_Max_630_378.png\

Here is the one for Excess Reserves- currently $1.6 trillion. Adding the two together should give you the Monteary Base. Base is $2.9 trillion instead of $2.7 trillion so I think that also includes required reserves too (which are not included in Excess Reserves).

http://research.stlouisfed.org/fred2/series/EXCRESNS
http://research.stlouisfed.org/fred2/data/EXCRESNS_Max_630_378.png


Notes:
Excess reserves are those deposits held by depository institutions at the Fed not used to satisfy statutory reserve requirements plus that vault cash held by the same institutions not used to satisfy statutory reserve requirements. Excess reserves equals total reserves less required reserves.


Some of the money measures in the US (some countries include different things in the different levels but in general the lower the number the greater the liquidity of the monetary instrument- MB is the Monetary Base):


M0: The total of all physical currency including coinage. M0 = Federal Reserve Notes + US Notes + Coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.

MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB = Coins + US Notes + Federal Reserve Notes + Federal Reserve Deposits

M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits

M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).

http://en.wikipedia.org/wiki/Money_supply

[TheTexan]

Free money comes in another form as well. That form is doing business with a counterfeiter.

A bank buys T-bond from Treasury
The Fed buys T-bond from bank

The profit the bank makes from this exchange, is "free money" IMO.

Then of course there's this same thing going on with other assets such as mortgage loans.

The banks are just serving as middle men for the Fed's counterfeiting activities. It's a very profitable place to be

[Zippyjuan]

Bank paid say $9000 for the bond from the Treasury (random number- face value is usually $10,000 [its value at maturity]- the difference between the face value and what it sold it is calculated as the interest rate or yield- higher prices= lower interest rates). Fed buys bond for $9000 from bank. Bank has same money they had before. Where is all the "Free money" in that? (the banks are competing against other buyers when they purchase via auction the notes from the Treasury and compete against other sellers again in an auciton process when they want to sell to the Fed so the margin isn't that much). They do make some money, sure- but not tons. A five year Treasury note yields less than one percent (0.75%). http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield The Fed isn't going to pay over face value so the most you will get from them is that 0.75% You may get one quarter of a percent (but probably less). The Fed is already paying one quarter of one percent interest on their excess reserves.

At 0.75% yield, the bank paid roughly $9,925 for the Treasury note. The Fed will pay somewhere between that and $10,000 to take it off their hands so they can make a maximum of $75 off that bond but likely much less.

[NoOneButPaul]

http://www.youtube.com/watch?v=zDAmPIq29ro

[TheTexan]

At 0.75% yield, the bank paid roughly $9,925 for the Treasury note. The Fed will pay somewhere between that and $10,000 to take it off their hands so they can make a maximum of $75 off that bond but likely much less.

A free $75 profit per note... and how many notes are they trading, again?