Easy Fed Bank Stress Test No Surprise: Mustafa

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March 21 (Bloomberg) -- Kamal Mustafa, Chairman and CEO of Invictus Consulting Group, discusses the Federal Reserve bank stress test and why all but one institution passed. He speaks on Bloomberg Television's “Market Makers.” (Source: Bloomberg)

Yesterday, what was your biggest takeaway?

Most of the presence focusing on paying dividends.

That was a foregone conclusion.

The banks accumulated enough capital thanks to the regulators.

Most of the bad assets that were created before the recession created the weaknesses.

The fact that they can pass is not a big surprise.

You know the cynical conspiracy theorist in me feels like these are rigged.

Am i off base?

Could they survive a 25% job and home values?

Or 11-12% drop in home rain?

They're not that great were that smart.

Since the recession, they have been accumulating.

They have been making good profits.

Most of the bad loans that caused the problem -- they have worked off their books.

What will be much more interesting is the numbers behind the scenes.

If you look at mortgages, everyone talks about mortgages.

Behind the scenes, there are some banks with single-digit losses.

Another bank for the same category has gone as high as 16%. for the first time, they're looking at earnings.

More than the quality of assets.

They're looking at growth, which is interesting.

They're looking at the individual.

What are the other factors?

We are looking at the approval next week.

What is behind them?

It is a big city bank.

They have losses out of a fraud case.

They will look at those controls.

Does the bank have the right controls?

The shift now is towards controls and reentering a new phase which is not evident from the results.

A used to be the quality of assets.

Now there is a focus on earnings.

The illusion that the banks are looking good is because you forced them to save their money.

For four years or five years, they could not pay dividends.

Once they get into that process, their earnings taken hit.

Can they maintain that?

I think analysts are projecting $75 billion in dividends.

How much of that is at risk?

I know a number of banks in the city can do four percent better.

Citibank says they can do three percent better tier 1 than the fed looked at.

Almost all of them -- the big ones have overestimated.

Here is the catch 22 -- it is a two-year stress test.

You make a loan today, it acquires 10% --$.10 in capital.

That will pay you one cent accumulated.

The more you grow, your capital requirements grow.

How did they game the system?

They showed low growth rates.

You require less capital.

This year, the fed says timeout.

You'll decide how --we will decide how you grow.

Will they be able to maintain their dividends?

They will maintain their dividends.

The question is, when there is tremendous opportunity, rates change.

Then there will be new sets of stress tests.

These tests will happen every year?

Every year, there is a new scenario.

Another stress test.

The stress test will start focusing more on earnings.

Growth will be the problem.

Will the fed always pass every bank?

Once they start -- your conspiracy theory is right.

I think the banks that fail fail for different reasons.

There were other failures within the details of the numbers.

The fed is giving the bank a message.

You better fix your portfolio quality.

There are hidden threats.

The fact that they could pay dividends -- accumulated earnings for 4-5 years.

You cannot read too much into it.

The numbers behind the

This text has been automatically generated. It may not be 100% accurate.


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