Posts Tagged ‘Dodd-Frank Act’

CFTC Gives Tentative Green Light to Volcker Rule

Wednesday, February 1st, 2012

The federal Commodity Futures Trading Commission (CFTC) proposed limiting banks’  proprietary trading and hedge fund investments under the Dodd-Frank Act’s Volcker rule. The CFTC  3-2 vote makes it the last of five regulators to seek public comment on the proposal. This vote opens the measure to 60 days of public comment.  The rule, named for former Federal Reserve Chairman Paul Volcker, was included in Dodd-Frank to rein in risky trading at banks that benefit from federal deposit insurance and Fed discount window borrowing privileges.

The CFTC stayed mum when the Fed, Federal Deposit Insurance Corporation, Securities and Exchange Commission and Office of Comptroller of the Currency released their joint proposal last year. The four agencies extended the comment period on their proposal until February 13 after financial-industry groups and lawmakers cited the complexity of the rule and the lack of coordination with the CFTC in requesting an extension.

The CFTC may soften Dodd-Frank a bit, granting Wall Street banks exceptions to rules requiring dealers to sensibly believe their derivatives are suitable for clients and in the best interests of endowments and other so-called special entities.  The rules “implement requirements for swap dealers and major swap participants to deal fairly with customers, provide balanced communications, and disclose material risks, conflicts of interest and material incentives before entering into a swap,” CFTC Chairman Gary Gensler said.

Opponents say the CFTC proposal would cause “severe market disruption” by transforming the relationship between swap dealers and clients such as pensions and municipalities, according to Sifma and the International Swaps and Derivatives Association, Inc.. Under the final rule, dealers must disclose material risks and daily mid-market values of contracts to their clients. The CFTC may also complete rules designed to protect swap traders’ collateral that is used to reduce risk in trades. The rule insulates the collateral if the broker defaults, while allowing the customer funds to be pooled before a bankruptcy, according to a CFTC summary of the regulation.

Commissioner Scott O’Malia voted in favor or the rule, but said he did not want to give market participants “a misleading sense of comfort” that it would have prevented the loss of customer money at the brokerage giant.  “This rulemaking does not address MF Global,” O’Malia said. “This rulemaking would not have prevented a shortfall in the customer funds of the ranchers and farmers that transact daily in the futures market. Nor would it have expedited the transfer of positions and collateral belonging to such customers in the event of a collapse similar to that of MF Global.”

Commissioner Jill Sommers, who voted against the rule, criticized the rule for doing nothing to protect a futures commission merchant’s futures customers.  “Given recent events, we need to re-think this approach so we can provide adequate protections, in a comprehensive and coherent way, to swaps customers and to futures customers,” Sommers said. “I do not favor a piecemeal approach to customer protection.”

Federal Regulators Floating the Idea of 20 Percent Downpayment Mortgages

Thursday, November 10th, 2011

Is a 20 percent downpayment on a house or condominium on the horizon?  If some federal regulators get their way, buyers may have to put down $60,000 on a $300,000 house to get the best possible mortgage interest rate.  Although this sets the bar high, regulators believe it will prevent the risky lending practices that ended in a rash of foreclosures.

Numerous groups immediately announced their opposition to the proposal, contending that a 20 percent downpayment is too burdensome for many working class would-be homebuyers.  If the proposal goes into effect in summer, it is not likely to have a major impact on the housing market for a while because the majority of mortgages are insured by federal agencies and are exempt from the rule.  John Taylor, chief executive of the National Community Reinvestment Coalition, said “If we require 20 percent downpayments to get a loan, we will ensure broad swaths of working- and middle-class people will not be able to get a loan.”  According to Tom Deutsch, executive director of the American Securitization Forum, believes the 20 percent requirement will do little to encourage banks to make loans without federal backing.  “The extremely rigid proposals…will further prolong the U.S. government’s 95 percent market share of the credit risk of newly originated mortgages,” he said.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, disagrees.  “Properly aligned economic incentives are the best check against lax underwriting,” she said.  The Federal Reserve and Treasury Department also support the move, and other federal regulators are expected to get behind the new requirement.  The move comes as the Obama administration is working to end Fannie Mae and Freddie Mac, the government-backed mortgage companies, by reducing the competitive advantage they have over banks.  One proposal is to require the agencies to charge higher fees to draw private firms back into the mortgage market.

Mortgage Bankers Association CEO John Courson warns that the 20 percent downpayment requirement would further damage already sluggish housing demand.  “We believe that such a narrow construct of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans,” Courson said.  Ron Phipps, president of the National Association of Realtors, said the new rules will further restrict mortgage credit and housing recovery overall.  “Adding unnecessarily high minimum downpayment requirements will only exclude hundreds of thousands of buyers from home ownership, despite their creditworthiness and proven ability to afford the monthly payment, because of the dramatic increase in the wealth required to purchase a home,” Phipps said.

Treasury Secretary Timothy Geithner, who is leading the regulatory effort, said “Risk retention will help promote better standards for underwriting and securitizing mortgages, which is good for the long-term health of the housing market and for our nation’s economy.”  An element of the Dodd-Frank Act that impacts the residential market, known as “risk retention”, is a rule that requires that mortgage lenders and securitizers to invest a minimum of five percent of the risk on qualified residential mortgages. The rule will play a crucial role in determining how much risk banks have to retain from mortgages they originate or package into bonds known as mortgage backed securities (MBS) and then subsequently sell into the market.  “If this proposal goes through, the way it’s written, I think the housing market will not recover for years to come,” says Joe Murin, chairman of consulting firm The Collingwood Group.

Federal Reserve Asks for Comments Before Implementing the Volcker Rule

Monday, October 24th, 2011

Federal regulators have requested public comment on the Volcker Rule — the Dodd-Frank Act restrictions that would ban American banks from making short-term trades of financial instruments for their own accounts and prevent them from owning or sponsoring hedge funds and private-equity funds.  The Volcker rule, released by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency, is intended to head off the risk-taking that caused the 2008 financial crisis.  The rule, which is little changed from drafts that have been leaked recently, would ban banks from taking positions held for 60 days or less, exempt certain market-making activities, change the way traders involved in market-making are compensated and assure that senior bank executives are responsible for compliance.

Analysts say the proposed rule could slash revenue and cut market liquidity in the name of limiting risk.  Banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., have already been winding down their proprietary trading desks in anticipation of the Volcker Rule kicking in.  Banks’ fixed-income desks could see their revenues decline as much as 25 percent under provisions included in a draft, brokerage analyst Brad Hintz said.  Moody’s Investors Service said the rule would be “credit negative” for bondholders of Bank of America Corporation, Citigroup, Inc., Goldman Sachs, JPMorgan and Morgan Stanley, “all of which have substantial market-making operations.”  The rule, named for former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act with the intention of reining in risky trading by firms whose customer deposits are insured by the federal government.

John Walsh, a FDIC board member and head of the Office of the Comptroller of the Currency, said that he was “delighted” that regulators had reached an agreement on the proposed rule, “given the controversy that has surrounded this provision — how it addressed root causes of the financial crisis.”  “I expect the agencies will move in a careful and deliberative manner in the development of this important rule, and I look forward to the extensive public comments that I’m sure will follow,” Martin J. Gruenberg, the FDIC’s acting chairman, said.  The rule will be open for public comment until January.

Not surprisingly, Wall Street opposes the rule, saying it will cut profits and limit liquidity at a difficult time for the banking industry.  Moody’s echoed those concerns, saying the current version of the Volcker rule would “diminish the flexibility and profitability of banks’ valuable market-making operations and place them at a competitive disadvantage to firms not constrained by the rule.”  Some Democratic lawmakers and consumer advocates are pushing to close loopholes in the rules, especially the broad exemption for hedging.  Supporters of the Volcker rule take issue with a plan to excuse hedging tied to “anticipatory” risk, rather than clear-and-present problems.  “Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute,” said Marcus Stanley, policy director of Americans for Financial Reform, an advocacy group.  Additionally, the Securities Industry and Financial Markets Association raised concerns about whether the exemption for trades intended to make markets for customers is too narrow.

According to Moody’s, the large financial firms all have “substantial market-making operations,” which the Volcker Rule will target.  The regulations also will recreate compensation guidelines so pay doesn’t encourage big risk-taking.  Derivatives lawyer Sherri Venokur said restrictions on compensation are “intended to create a sea change in the mindsets of those who create the culture of our banking institutions — to value ‘safety and soundness’ as well as profitability.”

Equity analysts at Bernstein say that the Volcker Rule — if implemented in its current form – will slash Wall Street brokers’ revenues by 25 percent, and cut pre-tax margin of their fixed income trading businesses by 33 percent.  According to Bernstein, the Volcker Rule’s potential limitations are a surprise because it appears to prohibit flow trading in “nonexempt portions” of the bond-trading business.  Bernstein says inventory levels – and, in all probability, risk taking – must be based on client demands and not on “expectation of future price appreciation.”

A Bloomberg.com editorial offers support to the Volcker Rule, while admitting it won’t be perfect.  According to the editorial, “This week, the first of several regulatory agencies will consider a measure aimed at ending the practice.  Known as the Volcker rule, after Paul Volcker, the former Federal Reserve chairman, the measure would curb federally insured banks’ ability to make speculative bets on securities, derivatives or other financial instruments for their own profit — the kind of ‘proprietary’ trading that can lead to catastrophic losses.  Whatever form it takes will be far from perfect.  It will also be better than the status quo.  The bank bailouts of 2008, and the public outrage over traders’ and executives’ bonuses, laid bare a fundamental problem in big institutions such as Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co.

“They attempt to combine two very different kinds of financial professionals: those who process payments, collect peoples’ deposits and make loans, and those who specialize in making big, risky bets with other peoples’ money.  When these big banks run into trouble, government officials face a dilemma. They want — and in some ways are obligated — to save the part of the bank that does the processing and lending, because those elements are crucial to the normal functioning of the economy.  But in doing so, they also end up bailing out the gamblers, a necessity that erodes public support for bailouts and stirs enmity for banks.  Separating the bankers from the gamblers is no easy task. Commercial banks’ explicit federal backing — including deposit insurance and access to emergency funds from the Federal Reserve — is attractive to proprietary traders, who can use a commercial bank’s access to cheap money to boost profits.  Bank executives like to employ traders because they generate juicy returns in good times that drive up the share price and justify large bonuses. In effect, both traders and managers are reaping the benefits of a government subsidy on financial speculation.  The Volcker rule will not — and probably cannot — fully dissolve the union of bankers and gamblers.”

How Did a Rogue UBS Trader Lose $2 Billion?

Tuesday, October 18th, 2011

The strange saga of how a rogue UBS trader lost $2 billion and who has since been fired and charged with fraud and false accounting in a London court has raised questions about the bank’s stability and whether it will retain its clients.  Ghana-born trader Kweku Adoboli was perceived as a polite and snappily dressed young man who mixed grueling hours in London’s financial district with a lavish social life in the capital’s nightspots.  But even the 31-year-old Adoboli appeared to foresee his work-hard, play-hard lifestyle coming undone.  “Need a miracle,” he posted on his Facebook page, just hours before his arrest.

Analysts and regulators questioned why the Swiss banking giant UBS and its monitoring systems had failed to spot Adoboli’s alleged fraud.  “Nobody blames the tiger for stalking its prey, but you do blame the zookeeper for leaving the tiger’s cage open,” said Stephen Brown, professor of finance at New York University’s Stern School of Business.  “These top banks hire the best and brightest ambitious young people and when they outperform everyone else the bankers want to believe in their brilliance so they look the other way.  That’s exactly what happened at UBS.”

Said a London based private banker at a rival global institution, “We don’t want to gloat because there but for the grace of God.  But it’s likely to be the kind of thing that if we were in competition with them for a pitch it would help us because it would be another question mark in people’s minds,” he said. 

Peter Thorne, an analyst at Helvea said this crisis is less serious than UBS’ previous woes and is unlikely to result in a similar stampede.  “I can’t believe they’re not going to do their utmost to maintain their clients. Also, if you’ve been through the financial crisis and you stuck with UBS you must love them, so I’m not sure you’re going to jump ship,” he said.

The Wall Street Journal’s David Weidner compares this case to that of Nick Leeson.  “Consider the story of Nick Leeson, the first trader to bring down a bank.  He racked up $1 billion in losses and was sentenced to six years in jail.  Barings Bank collapsed under the weight of the exposure.  Leeson said exceptional risk-taking was common.  He actually used an account that his team had set up to cover losses of a junior trader.  And as many accused rogues have argued, Leeson said the bank tacitly approved.  The number of rogue traders — there have been at least 11 since 1995 who have lost roughly $10 billion combined – suggests that Leeson may be right.  So, why is trading beyond internal limits allowed?  Because of the winners.  Enter Philipp Meyer, a former UBS derivatives trader who left the business a few years ago and wrote about the excess of the business.  To be clear, Meyer never said he made unauthorized trades, but he did offer this observation about trading.  ‘It was pretty clear what The Market didn’t like.  It didn’t like being closely watched. It didn’t like rules that governed its behavior.’”

Writing for Business Week, William D. Cohan says that “Whether UBS is shown to have been aware of Adoboli’s trading is almost beside the point.  If the bank was aware of it and did not stop it, then its failure to do so is unconscionable. If it was not aware of the trades, then its compliance and risk management departments’ failure to prevent them from happening in the first place is equally appalling.  In the post-Lehman, Dodd-Frank, Basel-III era, it is nearly unfathomable that a global bank of UBS’s heft, wealth and importance could allow this kind of loss to occur.  Where were the adults?  There will almost certainly be regulatory consequences for the rest of Wall Street as a result of this ill-timed debacle.  The banks will howl, but tighter rules could actually help protect the rest of us from their bad behavior.”

Happily for the United States and the Dodd-Frank laws, it’s less likely that a rogue trader could topple a major U.S. financial institution.  One section of the Dodd-Frank legislation is the Volcker Rule, named after former Federal Reserve chairman Paul Volcker, which limits American banks’ ability to trade their own funds.  That wasn’t true in 2008, when losses from bad bets that banks made on mortgages led to the meltdown of Bear Stearns and Lehman Brothers.  Full implementation of the Volcker Rule is expected to be delayed from its original July 21, 2012 deadline.  A majority of the largest American banks have already sold or closed the desks that make these trades – known as “prop” or proprietary trading desks.  “Banks can put themselves under with dangerous trading and take the commercial side with them as they go down,” said Robert Prentice, a professor of business law at the University of Texas’ McCoombs School of Business.  “A big part of what the Volcker Rule will do is separate out the risky trading from the deposits.”

A majority of the banking system depends on computers to spot abnormal trading activity that could signal unauthorized trades.  Industry watchers still question whether the Volcker Rule in its final form will mandate the spin-off of prop trading from banks or whether it will be watered down.  “You can’t underestimate the lobbying ability of the banking industry in the U.S. and the U.K.” said Stewart Hamilton, a finance and accounting professor at the University of Edinburgh.  “It’s huge.”

One Solution to Rundown Foreclosed Houses? Bulldoze Them

Wednesday, August 17th, 2011

Several banks have found a new solution to the glut of foreclosed houses – many of them in poor condition.  It’s the bulldozer. Bank of America (BoA) owns a glut of abandoned houses that no one wants to purchase.  As a result, the nation’s largest mortgage servicer is bulldozing some of its most uninhabitable inventory.  Additionally, Wells Fargo, CitiCorp, JP Morgan Chase and Fannie Mae have been demolishing a few of their repossessed houses.  BoA is donating 100 foreclosed houses in the Cleveland area and in some cases will contribute to the cost of their demolition in partnership with a local agency that manages blighted property.  The bank has similar plans impacting houses in Detroit and Chicago, and more cities tare expected to be added.

“There is way too much supply,” said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corporation, which works with lenders, government officials and homeowners to salvage abandoned homes.  “The best thing we can do to stabilize the market is to get the garbage off.”  Detroit mayor Dave Bing is in the process of ” right-sizing” the motor city by razing entire neighborhoods.

BoA plans to donate and bulldoze 100 houses in Cleveland, 100 in Detroit, and 150 in Chicago.  The lender will pay up to $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program.  Uses for the land include development, open space and urban farming.  “No one needs these homes, no one is going to buy them,” said Christopher Thornberg, founding partner at the Los Angeles office of Beacon Economics LLC.  “Bank of America is not going to be able to cover its losses, so it might as well give them away and get a little write-off and some nice public relations.”

Some foreclosed properties are so uninhabitable that the bank is willing pay to have them destroyed.  A bank spokesman said some in this category are worth less than $10,000.

Writing in The Atlantic, Daniel Indiviglio says that “The motivation here is pretty straightforward.  They get out of ongoing maintenance costs and taxes that they would have to pay as long as the property remains on the market.  But the even better news is that the banks can often write-off these properties as a result.  In some cases, banks can deduct as much as the homes’ fair market value from their income taxes.  From the real estate market’s standpoint this strategy is also positive.  With less supply, prices will stabilize more quickly.  Disposing of these foreclosures will make the market clear sooner.  And yet, the idea of bulldozing homes does seem rather unsavory, does it not?  Perhaps some of these homes are condemned and/or beyond repair.  In those cases, it might turn out to be more expensive to try to get them back up to code than it would be to knock them down and start over.  But does this really describe all of the cases?  This is reportedly happening to thousands of homes across the U.S.  My concern is that banks are using this as an easy out to minimize their loss with little concern about what’s best for the U.S. economy.  If some of these homes could be converted to perfectly adequate rental properties at minimal additional cost at some point in the future, for example, then this would make a lot more sense than knocking them down and building new homes from scratch.”

According to a Time magazine article,  “After multi-billion dollar legislative efforts in the form of the Stimulus, Dodd-Frank and stand-alone legislation, President Obama declared failure earlier this month and said he’s going back to the drawing board on a housing fix.  Negotiations between the 50 state attorneys general and the big mortgage lenders, rather than clearing the air for banks and borrowers, has become an enormous wet blanket as negotiations drag out and banks refuse to make any move without knowing how much of the reported $20 billion settlement will fall on them.  Economists argue that the failure to clear the housing market is a primary cause of the stunted recovery: continued household debt weighs on consumer spending, home ownership and excessive debt puts a drag on labor mobility, and banks fear the consequences of increased lending.”

Bernanke Talks Tough on Bank Regulation

Wednesday, May 18th, 2011

The Federal Reserve is identifying risks in the financial system that could someday erupt into a new financial crisis, but regulators must be careful not to unintentionally hamper lending as they set up new oversight, according to Chairman Ben Bernanke.   “We want the system to be as strong and resilient as possible,” and more intense oversight and changes such as requiring banks to hold more capital will help, said Bernanke at the Federal Reserve Bank of Chicago’s Bank Structure & Competition conference.  “If we can’t arrest risks, we want to make sure the financial system is defending itself,” he said.  The Dodd Frank Act establishes governmental structures to analyze risk aimed at preventing another financial failure as harsh as the one that almost brought down the world’s economy in the fall of 2008.

Through the Financial Stability Oversight Council and within the Fed, regulators are still analyzing what can cause “systemic risk,” – identified as risk that can cause widespread financial failure, Bernanke said.  Similar actions are underway in other nations; Bernanke said that regulators worldwide are communicating with each other while implementing their own systems.  If the new structures had been in place previously, Bernanke said, the 2008 financial crisis likely would not have happened. The old system of regulation spread authority across too many entities, was poorly coordinated, and problems “fell through the cracks.”  As the Federal Reserve develops a structure for analyzing risk, Bernanke said the focus must go beyond “fighting the last war.”  Future financial threats may differ from those of the past, which is why the banking industry currently is facing new oversight.  When some banks announced plans to pay shareholders dividends, regulators applied “stress tests” to their finances to determine if the institutions would be sound even if the economy weakened.  According to Bernanke, the government’s new stress testing system has provided accurate assessments of bank finances.

Even so, the regulations – the first new ones in 70 years — will be written to encourage bank compliance.  “No one’s interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit,” Bernanke said.  “Regulators must aim to avoid stifling reasonable risk-taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation.”

Bernanke and Fed officials are trying to balance the need to diminish the risk of another financial crisis with the aim of stimulating the economy after the worst recession since the Great Depression. The Dodd-Frank Act gives the Fed the job of overseeing the biggest financial companies.  “While a great deal has been accomplished since the act was passed less than a year ago, much work remains to better understand sources of systemic risk, to develop improved monitoring tools, and to evaluate and implement policy instruments to reduce macro-prudential risks,” Bernanke said.

Lawmakers who solidly opposed the financial overhaul legislation, say Dodd-Frank goes too far and might make it more difficult for American banks to compete globally.  Some are working to cut funding for agencies established by the law and limit the scope of new rules.  According to the General Accounting Office, the law will cost nearly $1 billion to implement in 2011.

Additionally, Bernanke cited the sovereign-debt concerns in Europe as an example where the analysis led to the May 2010 decision by the Federal Open Market Committee to authorize “dollar liquidity swap lines with other central banks in a pre-emptive move to avert a further deterioration in liquidity conditions.”

To listen to our podcast on financial reform with Anthony Downs of The Brookings Institution, click here.

The Fed Sends 19 Biggest Banks Back to the Treadmill

Wednesday, March 30th, 2011

The Federal Reserve‘s second round of stress tests requires the 19 largest U.S. banks to examine their capital levels against a worst-possible-case scenario of another recession with the unemployment rate hovering above 8.9 percent. The banks were instructed to test how their loans, securities, earnings, and capital performed when compared with at least three possible economic outcomes as part of a broad capital-planning exercise.  The banks, including some seeking to increase dividends cut during the financial crisis, submitted their plans in January.  The Fed will complete its review in March.

“They’re essentially saying, ‘Before you start returning capital to shareholders, let’s make sure banks’ capital bases are strong enough to withstand a double-dip scenario,'” said Jonathan Hatcher, a credit strategist at New York-based Jefferies Group Inc.  Regulators don’t want to see banks “come crawling back for help later,” he said.

The review “allows our supervisors to compare the progress made by each firm in developing a rigorous internal analysis of its capital needs, with its own idiosyncratic characteristics and risks, as well as to see how the firms would fare under a standardized adverse scenario developed by our economists,” Fed Governor Daniel Tarullo said. Although Fed policymakers aren’t predicting another slump any time soon, they want banks to be prepared for one.  In January, the Federal Open Market Committee forecast a growth rate of 3.4 percent or more annually over the next three years, with the jobless rate falling to between 6.8 percent and 7.2 percent by the 4th quarter of 2013.  Unemployment averaged 9.6 percent in the 4th quarter of 2010.

The new round of stress tests are being overseen by a financial-risk unit known as the Large Institution Supervision Coordinating Committee (LISCC).  The unit relies on the Fed’s economists, quantitative researchers, regulatory experts and forecasters and examines risks across the financial system.  Last year, the LISCC helped Ben Bernanke respond to an emerging liquidity crisis faced by European banks.  “The current review of firms’ capital plans is another step forward in our approach to supervision of the largest banking organizations,” Tarullo said. “It has also served as an occasion for discussion in the LISCC of the overall state of the industry and key issues faced by banking organizations.”

At the same time, Bernanke expressed his support for the Dodd-Frank Act, which will add new layers of regulation to the financial services industry, as well as the Consumer Protection Act. “Dodd-Frank is a major step forward for financial regulation in the United States,” Bernanke said, noting that the Fed is moving swiftly to implement its provisions.  Additionally, the Fed wants banks to think about how the Dodd-Frank Act might affect earnings, and how they will meet stricter international capital guidelines.  Banks will have to determine how many faulty mortgages investors may ask them to take back into their portfolios.  Standard & Poor’s estimates that mortgage buybacks could carry a $60 billion bill to be paid by the banking industry.

In the meantime, the big banks are feeling adequately cash rich to pay dividends to their stockholders.  Bank of America’s CEO Brian T. Moynihan said that he expects to “modestly increase” dividends in the 2nd half of 2011.  “We’d love to raise the dividend,” James Rohr, CEO of PNC, said.  “We’re hopeful of hearing back in March from the regulators.”  JPMorgan CFO Douglas Braunstein told investors that the bank asked regulators for permission to increase the dividend to 30 percent of normalized earnings over time.  Braunstein said that JPMorgan’s own stress scenario was more severe than the Fed’s, and assumed that the GDP fell more than four percent through the 3rd quarter of this year with unemployment peaking at 11.7 percent.

Clive Crook, a senior editor of The Atlantic, a columnist for National Journal, and a commentator for the Financial Times, believes that United States fiscal policy itself merits examination.  Writing in The Atlantic, Crook says that “Fiscal policy needs a hypothetical stress test, just like bank capital.  Let’s be optimistic and suppose that the deficit projections do hold, and that a debt ratio of 80 percent can be comfortably supported at full employment.  What happens when we enter the next recession with debt at that level?  Assume another really serious downturn, and another 30-odd percentage points of debt.  Worried yet?  That’s why the problem won’t wait another ten years, and why sort-of-stabilizing at 80 percent won’t do.”