Morgan Stanley, Goldman Got Help From Fed on Stress Tests

Federal Reserve officials told Goldman Sachs Group Inc. GS -0.72% and Morgan StanleyMS -0.56% that they were about to flunk a portion of the annual stress tests but offered them a deal to avoid an outright fail and continue paying billions to shareholders.

.. regulators told them that to fully pass the test, they would have to cut almost in half the combined $16 billion they had hoped to pay out to shareholders

.. Fed officials gave the banks an unprecedented option: If they agreed to freeze their payouts at recent levels, they would get a “conditional non-objection” grade and avoid the black eye of failure. That meant the banks could pay out a combined $13 billion, or about $5 billion more than what they would have given back to investors if they had decided to retake the test and get a passing grade.

It also will boost a profitability measure that helps determine how much Goldman Chief Executive Lloyd Blankfein and Morgan Stanley CEO James Gorman are paid.

.. The arrangement is the first of its kind in the eight years of the Fed’s annual tests, and one of the clearest signs to date of a significant shift in the regulatory environment for banks, which have been expecting a gentler approach from Washington ever since the election of President Donald Trump.

New refs, new rules,” consulting firm PricewaterhouseCoopers LLP wrote in a note.

This round of tests was the first graded by Trump appointee Randal Quarles, a former Wall Street lawyer and private-equity executive who last year became the Fed’s regulatory czar.

.. “This year’s stress test followed the same notification process as in past years—all firms were notified of the results and given the fixed option to reduce their capital payout plans with no negotiations,” a Fed spokesman said.

.. Fed officials said their leniency toward Goldman and Morgan Stanley was due in part to the impact of the 2017 tax law, which reduced the value of certain tax assets held by the banks and meant they entered the crisis scenario with diminished capital reserves

.. The stress tests, arguably the most visible sign of the postcrisis crackdown on Wall Street, are being changed in ways that benefit the industry. The Fed exempted three firms with less than $100 billion of assets from the test this year under the new banking law. Its treatment of Morgan Stanley and Goldman—as well as State Street Corp. , which got a pass although it also failed to clear capital requirements under the stress scenario—showed the Fed taking a more flexible approach to what had been a binary exercise.

“The Fed was very kind,” said Arthur Angulo, a managing director at Promontory Financial Group and a former Fed official. He added the Fed’s exercise of discretion on the quantitative portion of the test was “a potential slippery slope.”

.. The interim director at the Consumer Financial Protection Bureau, Mick Mulvaney, has largely stopped initiating new investigations and wants the consumer-finance regulator to be less antagonistic to the businesses it regulates.

.. If Goldman had been required to rejigger its plan until its capital ratios exceeded the Fed’s minimum, the bank would have been able to seek just over $1 billion in buybacks, instead of the $5 billion that was approved

Inside the Race for the Top Job on Wall Street

After college, Mr. Schwartz got into finance. His first day on a trading floor was Oct. 19, 1987. The stock market plunged 22 percent on what came to be known as Black Monday. He remembers a colleague crying.

“If you’re around that environment, I don’t know anybody that couldn’t be sensitized to the cyclical nature of the markets,” Mr. Schwartz said. It left him with a permanent sense of jitters over how easily capital can be destroyed.

.. “He’s always been a good shepherd internally in terms of managing risk and balancing that with clients’ interests,”

.. Mr. Schwartz is cautious and can be tightly scripted. As a general rule, he waits 48 hours to collect his thoughts before addressing someone who has really annoyed him.

Some colleagues say he has a tendency to “mark to market” his underlings — meaning that, in accounting terms, he assesses their value to his objectives and treats them accordingly. That has frustrated some people.

.. In the early 1990s, Mr. Solomon joined Bear Stearns, where he helped run the bank’s junk bonds division, working with bankers and salespeople to devise and sell higher-risk bonds. At one point, he helped a Dallas movie theater company, which was struggling to finance its expansion into Mexico, raise money through a complicated bond transaction.

.. In 1997, Mr. Solomon worked alongside Jon Winkelried, then the co-head of Goldman’s bond division, on a deal to raise money for the Venetian resort in Las Vegas. Mr. Winkelried was impressed with Mr. Solomon’s handling of the deal and offered him a job running Goldman’s leveraged finance team, again raising capital for companies through higher-risk bonds. It was a rare instance of Goldman hiring an outsider and awarding him the rank of partner.

.. “I thought he was on the leadership track at Bear,

.. Once, he showed up to pitch for the Lululemon Athletica initial public offering wearing a maroon jacket and long sweatpants made by the brand. His colleagues were similarly outfitted. “Everyone on the other side of the table is in suits and ties,” Mr. Solomon recalled. “It threw people off.” Goldman won a lead role on Lululemon’s I.P.O.

.. Mr. Solomon also leaned on executives in Goldman’s human resources office to hire far more women. Given the nearly even split in society, he argued, there was no reason that Goldman’s ranks should not be equally balanced between men and women. He has taken that message on the road, too.

How It Happened

by the latest count she won 400,000 more votes than Trump, who got fewer votes than either Mitt Romney or John McCain.

.. Trump won Florida by one; Trump won Wisconsin by fewer than 30,000 votes.

.. nearly 10 percent of millennials voted for third-party candidates

.. On the reasonable assumption that by far most of those who voted for the third-party candidates would have otherwise gone for Clinton, Gary Johnson, the odd-duck Libertarian, with 3.2 percent of the popular vote, and Jill Stein, of the Green Party, receiving just 1 percent, damaged and perhaps destroyed Clinton’s chances.

.. A CBS News exit poll found that if those who voted for Johnson or Stein had had to choose only between Clinton and Trump they would have supported Clinton by nearly two to one. It’s not a stretch to conclude that, absent the third-party candidates, Hillary Clinton would have won the election.

.. Hillary Clinton wasn’t giving people a reason to vote for her. “Stronger together” meant what?

.. Bill Clinton worried that the leaders of his wife’s campaign were too fixated on their supposedly fearsome get-out-the-vote drive and were failing to craft a coherent message for her

.. Bill Clinton worried that the leaders of his wife’s campaign were too fixated on their supposedly fearsome get-out-the-vote drive and were failing to craft a coherent message for her

.. The “moral” of the story may be that if you’re going to lie in the course of a public contest, lie so often that people can’t keep up with you

.. she started off being dismissive, and then sarcastic: asked in a press conference if she’d wiped her server she replied, “With a cloth?” And her explanations were often legalistic and evasive

.. she got nearly five million fewer votes than Obama did in 2012—resulted in the lowest voter turnout in twenty years

.. Trump channeled the anger at Washington institutions that particularly the working class felt had failed them, while Clinton came across as the very symbol of those institutions. Though Trump was a wealthy man, his populist message—even the baseball caps—made him seem accessible

.. The Clintons’ greed kept getting them in trouble.

.. white voters, whom Trump won almost across the board: not just among the working class, as expected, but also among college-educated voters, except for college-educated white women, whom Clinton won by a small margin. Among white men overall, Trump dominated, winning 72 percent of non-college-educated ones and 54 percent of those with a college education.

.. For many women voters, culture and class mattered more than gender.

.. David Wasserman of the Cook Political Report, by an innovative method he devised: look at how people voted in the 493 counties that have Cracker Barrel Old Country Stores, and in the 184 counties with Whole Foods stores. In 2012 Obama carried 75 percent of the counties that had a Whole Foods and 29 percent of the counties with a Cracker Barrel. But that spread was exceeded this year—in the other direction—with Trump winning 76 percent of counties with Cracker Barrel stores and just 22 percent of counties with Whole Foods.

.. Clinton came across to them as an creature from another, urban, world—a wealthy woman who liked big government and didn’t understand them.

.. He uses a critical word in describing how Trump wins the support of so many of his people: relatable. “People who are drawn to Trump are drawn to him because he’s a little outrageous, he’s a little relatable, and fundamentally he is angry and spiteful and critical of the things that people feel anger and spite toward,”

.. Trump did a good job instilling fear of an America overtaken by immigrants and it didn’t take much imagination to understand his dark prophecies of where, when blacks were also counted, this country was headed. Trump’s presidency won’t be a good time to be poor, especially a black person who is poor. And in Trumpland, with a president who ran a racist campaign, divisions between the races are set to deepen, as already shown in incidents of harassment and violence against minorities since the election.

.. His ideas for education play to those who don’t care for integrated schools

.. I always tell my clients, If you lose, lose big. Then you won’t chew over for the rest of your life what you should have done differently.” The close election is all the harder to shake off

.. Steve Bannon, of Breitbart News, pushes the “alt-right” theme of white supremacy and is believed to have been the guiding spirit behind Trump’s chillingly anti-Semetic final campaign ad, which charged that Clinton associated with three people who happen to be prominent Jews: George Soros (“those who control the levers of power in Washington”); Fed chairman Janet Yellen (“global special interests”); and Lloyd Blankfein (“put money into the pockets of large corporations”). It’s hard to see how it could have been more blatant. These weren’t “dog whistles,” they were dogs barking loudly.

.. Trump has led his followers to expect a lot. He promised to end Obamacare “on day one,” which will be difficult because it was passed by Congress and therefore isn’t his to eliminate.

  • Iran deal
  • renegotiate trade agreements to get better terms for America
  • bring back jobs to the US

.. In probably our most divisive and ugliest election ever, he prevailed in part because he intuited much about the voters’ psyche and he’s an experienced entertainer.

.. He knew how to appeal to the angry and discontented, who saw in him someone who would “shake up Washington” and deliver on his campaign slogan to “Make America great again.”

.. what happens if Trump fails to deliver to his followers? Who, and what, will they turn to next?