On July 11, at the Europlace International Financial Forum in Paris, Mr. Dimon, chairman and chief executive of the largest bank in the U.S., expressed concern that the Federal Reserve's unfolding plan to unwind it bond-buying programs, otherwise known as "quantitative easing", or QE, might not go as smoothly as many anticipate. Last month, the Fed announced that it would soon start selling some of its portfolio of $4.5 trillion of treasury bonds, $3.5 trillion of which has been amassed in several rounds starting late in 2008.
"We've never had QE like this before, we've never had unwinding like this before," said Mr. Dimon at the conference. "Obviously that should say something to you about the risk that might mean, because we've never lived with it before." All the main buyers of sovereign debt over the last ten years, i.e., financial institutions, central banks and foreign exchange managers, will become net sellers, Mr. Dimon noted. "When that happens of size and substance, it could be a little more disruptive than people think," Mr. Dimon continued. "We act like we know exactly how its going to happen and we don't" Central banks aim to provide certainty but you "cannot make things certain that are uncertain."
Of course, it is no coincidence that QE started a month or so after the passage of the legislation that authorized $700 billion to purchase "troubled" assets via the Troubled Asset Relief Program (TARP). Both were intended, in large part, to stabilize the critical financial sector. While QE boosted liquidity in the economy in part to promote lending, TARP was intended to shore up the balance sheets of financial institutions of all sizes. The initial proposal to purchase "troubled" assets, mainly mortgage-backed securities containing subprime mortgages, quickly gave way to the plan to purchase preferred shares in banking companies (coupled with warrants to purchase their common shares as an equity kicker) due the complexity of pricing the target assets and the need for expedience under the dire circumstances.
Some major financial institutions only reluctantly got with the program, so to speak. Having quipped that there's no "A, R or P" in the government's Troubled Asset Relief Program, U.S. Bancorp (USB) CEO Richard Davis went on to say back in February 2009 that "[w]e were told to take it so that we could help Darwin synthesize the weaker banks and acquire those and put them under different leadership." In June of the same year, BB&T (BBT) chairman John Allison said "[i]t was a huge rip-off for us," complaining that the bank was paying 9% on the TARP funds that "we didn't want in the first place." Because "TARP contributed to an unnecessary panic in the marketplace that still hasn't been fully restored[,...t]he decision by the U.S. Treasury and the Federal Reserve in October 2008 to make the banks take TARP money even if they didn't want it or need it was one of the worst economic decisions in the history of the United States," contended former Wells Fargo (WFC) CEO Dick Kovacevich at the Stanford Institute for Economic Policy Research in June of 2012.
Bank of NY-Mellon CEO Robert Kelly, on the other hand, asserted that TARP "helped avert a global calamity." To be sure, many banks of varying size were in dire need of the capital infusion to keep the doors open. The Treasury Department distributed a total of $313 billion in capital to financial institutions through these initiatives. The government came out ahead on TARP and the separate support of Citigroup (C) and Bank of America (BAC), showing a net gain of $24 million. The Congressional Budget Office (CBO) reported in June that, overall, TARP is in the red to the tune of $33 billion, owing mainly to losses on assistance for American International Group (AIG), the automotive industry and mortgage programs.
American Express' (AXP) TARP preferred stock and warrants provide an example of a profitable transaction for the Treasury. In June of 2009, the company repaid the $3.39 billion it had received for issuing the previous January preferred stock carrying a 5% annual interest rate; it had also paid $74.4 million in accrued interest. A month later, the company agreed to repurchase the associated warrants held by the Treasury for $340 million. All told, the Treasury's return on investment was over 12%.
Less than a year after receiving the funds, Bank of America finished repaying the U.S. Treasury $45 billion after having paid $2.54 billion in dividends on the preferred stock. In connection with this repayment late in 2009, the company issued Common Equivalent Securities, which subsequently required it to seek shareholder approval to increase BAC's authorized shares outstanding from 10 to 11.3 billion, eliciting some opposition due to shareholder dilution. Because the company and the government could not agree on price, the Treasury Department auctioned off the associated warrants for $1.54 billion, bringing its total return on the BAC capital infusion to 9%.
The table below lays out the TARP principal disbursements to each of the 34 major financial institutions recently given a clean bill of health by the Fed. The eight institutions below that received no funds via TARP are U.S. subsidiaries of foreign entities, and thus were not eligible for this program. However, several of the institutions, e.g., HSBC, benefited significantly from other Fed funding. CIT Group, which emerged from bankruptcy in 2013, was the only recipient in this group that was unable to redeem the preferred stock and repay the Treasury. If Mr. Dimon is correct that the normalization of Fed policy, i.e, shrinking its balance sheet along with lifting interest rates, means that banking sector is heading into uncharted - and perhaps rough - waters, then the stabilization of its flagship institutions comes at an opportune time.
Named CEO of Bank One in 2000 and then JPMorgan in 2005, the estimable Mr. Dimon has sounded a warning to the financial sector - and perhaps to the nation as a whole - that "the tide is going out;" only then, his friend Berkshire Hathaway (BRK.A) CEO Warren Buffett has observed, do you "find out who is swimming naked."
Robert Stead
| Institution | Investment |
| Ally | $17,200,000,000 |
| American Express | $3,390,000,000 |
| BankWest | |
| Bank of America | $45,000,000,000 |
| Bank of NY-Mellon | $3,000,000,000 |
| BB&T | $3,100,000,000 |
| BBVA Compass | |
| BMO * | $1,700,000,000 |
| Capital One | $3,570,000,000 |
| CIT | $2,330,000,000 |
| Citigroup | $45,000,000,000 |
| Citizens | |
| Comerica | $2,250,000,000 |
| Deutsche Bank Trust Co. | |
| Discover | $1,200,000,000 |
| Fifth Third | $3,400,000,000 |
| Goldman Sachs | $10,000,000,000 |
| HSBC | |
| Huntington | $1,400,000,000 |
| JPMorgan Chase | $25,000,000,000 |
| Keycorp | $2,500,000,000 |
| M&T | $750,000,000 |
| Morgan Stanley | $10,000,000,000 |
| MUFG Americas | |
| Northern Trust | $1,576,000,000 |
| PNC | $7,600,000,000 |
| Regions | $3,500,000,000 |
| Santander | |
| State Street | $2,000,000,000 |
| SunTrust | $4,850,000,000 |
| TD Group | |
| U.S. Bancorp | $6,600,000,000 |
| Wells Fargo | $25,000,000,000 |
| Zions | $1,400,000,000 |
| TOTAL | $233,316,000,000 |
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