The Sorkin papers reveal that Citi has managed to get a notice of retraction from the Fed clarifying that the Loss suffered in Stress Testing for 27 quarters was limited to US domestic mortgages and the conditions on European breakdown and Equity market corrections. While Citi’s global mortgage portfolio is $133 bln, The International mortgages are $38 bln and The other $95 bln are US domestic mortgages on which a 9.3% instead of the 9.7% loss was effected by the stress scenario. That is the Fed calculated it on the right assets but counted the wrong assets in the denominator when calculating the percentage and as of now the two scenarios in which Citi ended with 5.9% and 4.9% on the Tier I common Equity is still the same.
The $38 bln outside the US are unlikely to suffer loss mitigation in value or to say the Fed would not be concerned about making such assumptions as a matter of policy making one wonder that the Dodd Frank rule may end up being a nother Great appendage like the GLB Acts and the Glass Steagall Act before once the leverage cap of 12 times was removed by the Fed in 2004.. many derivatives trades have an international counterparty even when they hedge Dollar risk and can be domiciled similarily abroad leaving them out of trading/ market making and other restrictions and increasing chances of shadow bankers or bankers themselves gaming the Fed.
The Fed also issued corrections for Bank of America, Ally Financial, MetLife and Wells Fargo. It said the corrections did not change the capital ratios projected by the stress tests, which estimated the losses that a bank could bear amid situations that include a severe recession and a market meltdown.
As of now, however Citi is somehow taken it to heart that it is being gamed by the Fed, putting out today’s clarifications by the Fed as some sort of vindication of their stand of unfair treatment by the Fed in a bid to save the Super dividend they over calculated when they send the application/request to the Fed for 2012. If citi hasd recommended a $1 bln less in buybacks their assets would have cleared the test easily and even less considering they failed the test by all of 0.1% or needing 2% more than the equity (tier I common ) they left on their balance sheet after the 2012 deduction.
Citi is still in the War room with the Fed, looking for reasons to safekeep its dividend plan which it could succeed in, but the belligerent tone adopted in the letter seems to be followed up in later interactions with th Fed, thinking it wasn’t Citi’s problem they withdrew a bit too much from the bank for the ccash returns to investors. Presumably this could also scuttle the bank’s chairman reshuffle, though vikram Pandit has walked away with the $15 bln bonus having cleared the crisis out of the bank’s eyes..
- Citi to submit revised capital plan to the Fed(marketwatch.com)
- Morgan Stanley cuts 1600 jobs(advantages.us)
- Fed chooses New Capital rules for its Large Banks | Advantage Banks(advantages.us)
- FOMC goes by on expected lines(advantages.us)
- Banks scoring $7 under par in 2011(advantages.us)
- Federal Reserve: 15 major U.S. banks pass ‘stress test’ while Citigroup, three others fail(oregonlive.com)
- US Economy: Not a wrinkle on the dollar for 2011(advantages.us)