Citigroup’s new financial plan was rejected by the Fed. The Fed report says it rejected the plan in advance because of errors in form that meant that the plan was too far removed from real life. It had instructed the bank to correct the errors, but for reasons unknown, the bank failed to do so. Citigroup is left to pay a smallish dividend of 1¢ per share for another year. Zions Bancorp and three foreign-owned banks also had capital plans rejected and cannot increase dividends this year. Goldman Sachs and Bank of America had their plans approved only after they scaled back their dividend plans.
Banks that last year were rushing to lend to Russia now hope they did not overextend themselves. Russia, more than any other country, depends on exports of materials to keep its economy going, and if those exports are a little smaller than planned because of other countries’ worries about Russia’s intentions, Russia’s economy will be in recession and debt payment will likely be late. Just the slowdown in foreign investment and lending that has already taken place is enough to cause a recession in Russia through the end of this year, according to consensus estimates. And things could get much worse if a trade war breaks out. In that situation, observers think, a depression is assured. That scenario was made more likely by Russia’s moves to ban specific foreign investors and traders this week.
Gotti Tedeschi, the Vatican Bank head who was removed in 2012 by an apparently corrupt board in an apparent attempt to silence him and delay reforms at the bank says he may sue his former employer to clear his name. The board said in its dismissal action that Tedeschi was ineffective and divisive, but badly needed reforms at the bank have not gone forward since then. The board members who had moved to block reforms remain in their posts.
Jiangsu Sheyang Rural Commercial Bank in China was hit by an extended run which was exacerbated by extensive media coverage. The bank took to displaying huge stacks of bills in its teller windows in an attempt to reassure depositors that it had plenty of cash on hand. It stayed open all night to process withdrawals, and the central bank made special arrangements to supply as much cash as needed. Depositors in China have understandably become nervous, as China is now for the first time permitting ineffectively managed businesses to go under, and the country officially has no deposit insurance. A deposit insurance plan is in the works but is probably two or three years away from being implemented.
Treasury has announced an IPO to sell a 20 percent share in Ally Bank, the successor to GMAC. GMAC was perhaps the most puzzling of the large bank bailouts from the Wall Street Bailout era, as the bank at the time was losing money and lacked a credible business plan. Worse, its mortgage business appeared headed for bankruptcy. GMAC’s turnaround and Treasury’s apparent profit on its bailout are a testament to how easy it has become for banks to make a profit on legacy loans with interest rates kept artificially low.
There is a troubling boom in subprime auto loans, with loans being extended to middle-income workers who do not earn enough to meet the payments. This squeeze is the result of an increase in new car prices to their highest levels ever and lenders’ failure to adjust to the changes.