Banks’ Living Wills Pronounced Dead on Arrival

Last week, U.S. regulators essentially pronounced the so-called Living Wills of five of the eight largest financial institutions (Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street, and Wells Fargo), dead on arrival. The other three (Goldman Sachs, Morgan Stanley and Citigroup) fared better, because their plans escaped being termed “not credible”. (While Goldman’s plan was green-lighted by the Fed, the FDIC found problems and with Morgan Stanley, it was the other way around. Citigroup won provisional approval from both regulators, but must address “shortcomings” in its plans.) Considering that not one bank got a full-blown thumbs up as to how it would wind itself down amid a bankruptcy, without taking down the system, without the assistance of taxpayers or without addressing shortcomings, they are still too big to fail. However, this does not mean that the banks are in the same precarious state that they were in 2008-2009; rather their “break the glass” emergency plans are not yet strong enough to convince both the Fed and the FDIC that they would be able to unwind themselves without destabilizing the system.

Background: Before the financial crisis regulators had not properly monitored or constrained risk-taking at the nation’s largest firms. When the crisis hit, the government “did not have the tools to break apart or wind down a failing financial firm without putting the American taxpayer and the entire financial system at risk.”

To prevent that from happening in the future, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act required that large banks (total consolidated assets of $50B or more) submit plans to both the Federal Reserve and the Federal Deposit Insurance Corporation as to how they would navigate a bankruptcy without taking down the entire financial system and with no taxpayer bailout. The goal was “If a firm fails in the future it will be Wall Street – not the taxpayers – that pays the price.”

These plans are known as “living wills”—and just like an end of life directive on which the name is based, they must contemplate what would occur under the worst circumstances. Each bank is required to describe its strategy for rapid and orderly resolution in the event of material financial distress or failure of the company.

What happens next? Although the annual filing deadline is July 1, 2017 the institutions must resubmit updated plans by this October. If any of them fail, they could face higher capital, leverage or liquidity requirements; or potentially might have to exit certain businesses entirely. Meanwhile, financial company shareholders did not seem especially worried about the living will issue: amid weak earnings releases from J.P. Morgan, Bank of America and Wells Fargo, bank stocks gained 7 percent on the week. 

MARKETS:

• DJIA: 17,897 up 1.8% on week, up 2.7% YTD
• S&P 500: 2080 up 1.6% on week, up 1.8% YTD
• NASDAQ: 4938 up 1.8% on week, down 3.1% YTD
• Russell 2000: 1131, up 3% on week, down 0.4% YTD
• 10-Year Treasury yield: 1.75% (from 1.872% a week ago)
• May Crude: $40.40, up 1.6% on week
• June Gold: $1,234.60, down 0.8% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.11 (from $2.04 wk ago, $2.41 a year ago)

THE WEEK AHEAD: The world’s major oil producers will meet in Doha on Sunday. Analysts expect the announcement of a deal that would freeze OPEC and Russian oil output at current high levels. However, it would not likely reduce excess supply without a pick-up in demand or supply cuts by non-OPEC producers.

Mon 4/18:

Morgan Stanley, Netflix, Pepsi, IBM

10:00 Housing Market Index

Tues 4/19:

Goldman Sachs, Intel, Johnson & Johnson, Yahoo

8:30 Housing Starts

Weds 4/20:

Abbott Labs, AMEX, Coca-Cola, Mattel, Yum! Brands

10:00 Existing Home Sales

Thursday 4/21:

Alphabet, Microsoft, Starbucks, Verizon, Visa

8:30 Philly Fed Business Outlook Survey

8:30 Chicago Fed National Activity Index

8:30 FHFA Home Price Index

Friday 4/22:

American Airlines, General Electric, Caterpillar, McDonald’s, Schlumberger

Retail Therapy

What do Wal-Mart, Family Dollar Stores, Lumber Liquidators and the Container Store have in common? CEO’s from all of these retailers lamented the tepid pace of consumer spending. One even labeled the condition a “retail funk” that has infected the US economy. Let’s start with the biggie: Wal-Mart President and CEO Bill Simon told both Reuters and CNBC that shoppers have not returned to world’s largest retailer at the pace one might expect five years after the recession ended, because “middle-class and lower-class are still economically challenged, only spending during holidays and for family occasions." Despite gains in employment, Simon predicted it would take six months to a year for retailers to start seeing a sales boost from job growth. “We’ve reached a point where it’s not getting any better but it’s not getting any worse – at least for the middle (class) and down." The numbers bear out those sentiments: sales at Wal-Mart's U.S. stores have fallen for five straight quarters, and traffic has dwindled for a year and a half.

Family Dollar Stores reported disappointing quarterly earnings last week and CEO Howard Levine said, "Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment." Similarly, Lumber Liquidators’ CEO Robert Lynch said that earnings were weaker in the first quarter due to bad weather, but the much-hoped for spring-awakening did not occur and “Customer traffic to our stores was significantly weaker than we expected.”

But it was The Container Store’s CEO Kip Tindell (check out this 2011 CBS Sunday Morning segment about The Container Store and CEO Tindell), who actually diagnosed the problem: “Consistent with so many of our fellow retailers, we are experiencing a retail 'funk'…we continue to experience slight traffic declines in this surprisingly tepid retail environment. While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014 – so we’re not alone in this."

Investors will be eager to see whether other retailers have felt the pinch. The June Retail Sales report will be released on Tuesday and many economists are keeping a keen eye on the results. Sales have been inching up, but there has yet to be a broad-based, consistent gain among a variety of retailers. Despite the woes at the companies noted above, carmakers have enjoyed big gains and high-end retailers, like Tiffany’s and Burberry Group have been racking up the sales.

One thing is clear: until more Americans feel confident enough in the economy to spend more money, we are likely to see mixed results and sub-par growth. We’ll hear a little more about the nation’s progress this week, when Fed Chair Janet Yellen testifies before the Senate Banking and House Financial Service Committees. After minutes from the central bank’s recent policy meeting revealed that the Fed is planning to wrap up its bond buying program in October, lawmakers are likely to ask when the Fed will begin to raise short term interest rates. Based on the economic projections submitted at the most recent policy meeting, officials expect the first rate hike will occur around the middle of next year.

MARKETS:

• DJIA: 16,943, down 0.7% on week, up 2.2% YTD
• S&P 500: 1967, down 0.9% on week, up 6.5% YTD
• NASDAQ: 4,415, down 1.6% on week, up 5.7% YTD
• 10-Year Treasury yield: 2.52% (from 2.64% a week ago)
• August Crude Oil: $100.83, down 3.1% on week (4^th consecutive weekly loss)
• August Gold: $1337.40, up 1.3% on week (4^th consecutive weekly gain)
• AAA Nat'l average price for gallon of regular Gas: $3.62 (from $3.55 a year ago)

THE WEEK AHEAD: The financial services sector will headline earnings reports in the week ahead. Analysts predict it will be a tough quarter, with revenue declining by 5.6 percent from a year ago and profits down by 10.3 percent. Investors will pay special attention to Citigroup’s report, after it was reported that the bank and the Justice Department were nearing a $7 billion dollar deal to settle a civil investigation into the sale of mortgage investments.

Mon 7/14:

Citigroup, Barclay’s

Tues 7/15:

Goldman Sachs, JP Morgan, Johnson & Johnson, Yahoo, Intel

8:30 Retail Sales

8:30 Empire State Manufacturing Index

8:30 Import/Export Prices

10:00 Business Inventories

10:00 Janet Yellen testifies before Senate Banking Committee

Weds 7/16:

Bank of America, eBay, Yum! Brands

8:30 Producer Price Index

9:15 Industrial Production

10:00 Housing Market Index

10:00 Janet Yellen testifies before House Financial Services Committee

2:00 Fed Beige Book

Thurs 7/17:

Morgan Stanley, Google, Schlumberger

8:30 Weekly Jobless Claims

8:30 Housing Starts

10:00 Philadelphia Fed Survey

GE CEO Mary Barra and general counsel Mike Millikin testify before a Senate subcommittee on why it took so long to recall cars with faulty ignition switches.

Fri 7/18:

General Electric

9:55 Consumer Sentiment