STOCK MARKET WATCH - Monday, 5 March 2012

[Demeter]

28. Reckless: The Inside Story of How the Banks Beat Washington (Again)

http://www.theatlantic.com/business/archive/2012/03/reckless-the-inside-story-of-how-the-banks-beat-washington-again/253883/

One year ago, the largest financial institutions on Wall Street were desperate to show off their strength by paying out, or raising, dividends for the first time since the Great Recession. After conducting a secretive test of the banks' health, the Federal Reserve granted most of their requests in March 2011 -- over loud objections from economic luminaries in Washington and across the country. Now, for the first time, we tell the story of why the Federal Reserve caved, and how Wall Street still owns the place.

In March 2011, the Federal Reserve green-lighted most of the top 19 financial institutions to deliver tens of billions of dollars to shareholders, including many of their own top executives. The 19 paid out $33 billion in the first nine months of 2011 in dividends and stock buy-backs.

That $33 billion is money that the banks don't have to cushion themselves -- and the broader financial system -- should the euro crisis cause a new recession, tensions with Iran flare into war and disrupt the oil supply, or another crisis emerge.

This is the first in-depth account of the Fed's momentous decision and the fractious battles that led to it. It is based on dozens of interviews, most with people who spoke on condition of anonymity, and on documents, some of which have never been made public. By examining the decision, this account also sheds light on the inner workings of one of the most powerful but secretive economic institutions in the world.

The Federal Reserve contends it assessed the health of the banks rigorously and made the right decisions. The central bank says the primary purpose of the stress test was to assess the banks' ability to plan for their capital needs. The Fed allowed only the healthiest banks to return capital -- and they are still not paying anything like the proportion of profits that they distributed in the boom years. And it says the stress test covered only one year. Regulators say they can revisit their decisions if the economic picture turns bleaker.

Most important, Fed officials argue that the biggest financial institutions still added $52 billion in capital to their balance sheets in 2011 despite raising dividends or buying back stock. The top 19 financial firms had a 10.1 percent capital ratio by the end of the third quarter of 2011, using the measure that regulators primarily look at, nearly double what they had in the first quarter of 2009.