We Have Now Reached The Perfect Set-Up for Banking Meltdown 2.0

While mark-to-market has still not been reinstated for banks, it looks like these financial institutions are planning to empty the few little real cash they have in their coffers, in order to buy back shares and pay dividends, and all this with the blessing of the Government and the Fed.

In addition, the Treasury now believes is the right time to start selling the toxic assets — it's weird for me to believe that they might have the timing right, something's fishy here...

Again, all red flags are now raised, as they after day, confidence in the bubble economy and false recovery is getting higher and higher, and getting wider and wider acceptance.

Here's a lit of what is currently happening, in just about a week:
  • Banks have been authorised by the Fed to buy back shares and pay dividends, emptying the little actual cash they are currently holding, against the mountain of toxic mortgages and other debt instruments, and overpriced equities.
  • The Treasury Department is planning to sell $10 billion worth of their Fannie and Freddie paper, per month. These toxic debt will most certainly end up on banks balance sheets again.
  • Citigroup is putting lipstick on the pig by giving a $0.01 dividend, and doing a reverse stock split in order to move the share price from $3 to $30.
  • The Fed has been forced by the Supreme Court to reveal the information about the emergency lending it conducted, hopefully unmasking the most insolvent institutions by doing so — I'll write another post about this.
  • Existing Home Sales in U.S. Slump — Prices Drop to Lowest Since April 2002
  • Total housing starts were sharply down (-22.5%) from the revised January and barely up from the all time record low in April 2009.
As a side note, it's laughable that people are putting so much trust in the stress tests coming out of the Fed, given the track record of these ignorants and the lack of market-to-market.
March 18 (Bloomberg) -- The Federal Reserve cleared some of the 19 largest U.S. banks to increase dividends, buy back shares or repay government aid after “significant improvement” in their capital and the economy.

The banks, including firms such as Goldman Sachs Group Inc. (GS) and JPMorgan Chase (JPM), have increased common equity by more than $300 billion from the final quarter of 2008 through the end of 2010, the Fed said in a paper released today in Washington on its most recent review of bank capital.

Overall, both the quantity and quality of capital at many large bank holding companies have improved since the financial crisis,” the Fed said. “The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks’ long-term access to capital.”
This is the strongest signal yet that the economy is starting to return to normal,” said Jaret Seiberg, a financial policy analyst for MF Global’s Washington Research Group. “Banks are going to be significantly raising their dividends and engaging in share buybacks in a way that recognizes their return from much more dire financial straits.”

The Fed’s stress tests are part of a move toward higher standards for capital and risk management mandated by U.S. legislators and international regulatory accords. The Fed wants to ensure bank boards make capital-payout decisions while weighing a full range of risks and their capital needs for at least two years.

San Francisco-based Wells Fargo, the nation’s largest home lender, authorized the repurchase of 200 million shares and a special dividend of 7 cents a share, which will raise the first- quarter payout to 12 cents. JPMorgan said it will boost its quarterly dividend to 25 cents a share from 5 cents and authorized a $15-billion stock repurchase.
The central bank also said that approval of plans would only apply to 2011. Capital distributions in 2012 will be subjected to a future supervisory review.

“In reality, bank holding companies would be expected to reduce distributions under adverse conditions,” the Fed said.

The dividend increases were one of the most carefully screened payouts in U.S. regulatory history, with more than 100 Fed staff working on the analysis. The central bank’s involvement in decisions normally reserved for boards shows how far the Dodd-Frank Act has pushed regulators into corporate governance.

Central bank supervisors asked the banks to test the performance of their loans, securities, and earnings against at least three economic scenarios. Banks devised baseline and adverse scenarios, and Fed supervisors provided a separate adverse scenario involving another recession with unemployment exceeding 11 percent.

Overall, both the quantity and quality of capital at many large bank holding companies have improved since the financial crisis,” the Fed release said. The 19 companies’ Tier 1 common ratio rose to 9.4 percent in the fourth quarter of 2010 from 5.4 percent two years earlier, the Fed said.
The Federal Reserve does not intend to disclose any firm- specific results,” from the test, the report said.

March 19 (Bloomberg) -- U.S. bank investors may be rewarded with an extra $22 billion annually after government tests showed the industry has regained enough strength to boost dividends and share buybacks.

JPMorgan Chase, Wells Fargo and Goldman Sachs Group Inc. were among six lenders that disclosed more than $16.2 billion in share buybacks and $5.4 billion of annualized dividend increases yesterday, according to data compiled by Bloomberg. The banks made their announcements after learning they passed a Federal Reserve review of their financial health.

This is a real signal by the Federal Reserve to tell the world that the U.S. banking system is back,” said Gerard Cassidy, an analyst at RBC Capital Markets. “We are going to see, in our view, over the next three years, a dramatic increase in the dividends.”

March 21 (Bloomberg) -- Citigroup Inc., the U.S. bank that received the largest taxpayer bailout, said it would reinstate a dividend at 1 cent per share in the second quarter after a planned 1-for-10 reverse split of its common stock.

Citigroup [...] will exchange 1 new share for every 10 of common stock after the close of trading on May 6, the New York-based bank said today in a statement.

“It puts some make-up on the black eye they have,” said David Knutson, a credit analyst with Legal & General Investment Management, which oversees about $85 million of Citigroup bonds. “They’re doing it for the same reason why people put up billboards on the sides of highway. It’s advertising, it’s marketing.”

21 March (Bloomberg) -- The U.S. Treasury Department plans to wind down its $142 billion portfolio of mortgage bonds guaranteed by Fannie Mae and Freddie Mac by selling as much as $10 billion per month.

Sales will start this month and be subject to market conditions, the department said today in a statement. When combined with principal repayments currently ranging between $3 billion and $5 billion a month, the sales may eliminate the portfolio in about one year, the Treasury said.
The sales will have a limited effect on the $5.2 trillion market for agency mortgage bonds, Anish Lohokare, an analyst New York at BNP Paribas, said in an e-mail.
That’s because fewer homeowners have been refinancing loans from the Fed’s pool of mortgage-backed securities, limiting the amount of debt returning to public markets, Lohokare said. The pace at which the Fed’s holdings are being paid down has declined to about $12 billion a month from as much $32 billion last year after home-loan rates rose, he said.

The Fed held about $944 billion of Fannie Mae, Freddie Mac and Ginnie Mae-backed mortgage securities as of March 16, according to central bank data.

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