And JPMorgan economists painted a grim picture of the downturn ahead, projecting GDP to decline 40 percent this quarter and unemployment to reach 20 percent.
Yet the banks plan to continue to reward their shareholders by paying out dividends, raising alarms among some watchdogs and former regulators.
“Banks really don’t know how bad things are going to get over the next three to six weeks and beyond,” says Gregory Gelzinis, a policy analyst at the liberal Center for American Progress. “Given that cloud of uncertainty, paying dividends now is a real mistake.”
The pushback highlights the politically perilous position facing the industry.
Banks are navigating their second economic emergency in as many decades. Unlike the 2008 financial meltdown, they played no role in precipitating the current crisis. But policymakers now are enlisting the firms as economic first responders, deploying them to the front lines of the massive federal effort to keep small businesses afloat with forgivable loans, for example.
Industry leaders recognize the moment presents an opportunity to regain some of the public trust they torched over a decade ago. To that end, eight of the biggest U.S. banks announced last month they are voluntarily suspending stock buybacks through June, explaining in a statement the move is “consistent with our collective objective to use our significant capital and liquidity to provide maximum support to individuals, small businesses and the broader economy through lending and other important services.”
But the decision by JPMorgan and Wells Fargo to continue doling out dividends indicates there is a limit, for now, to what the banks will forfeit on their own in the name of maximizing their firefighting capacity.
Halting buybacks will have a bigger effect on banks’ reserves, the Wall Street Journal’s Telis Demos notes. “For perspective, adding 2019 buybacks to capital for the biggest U.S. banks would have raised their core equity capital ratios by more than 1 percentage point based on last year’s results, according to S&P Global Market Intelligence data. Adding dividends would have increased them by a further roughly half a point.”
Yet dividends represent a significant and growing sum. As Renae explains, “Among America’s biggest banks, JPMorgan Chase and Wells Fargo have paid out the most in dividends to shareholders since 2008, about $80 billion each, according to S&P Global Market Intelligence data. Bank of America and Citigroup paid out about $52 billion and $30 billion, respectively, during that period.
“‘For bank stocks, generous dividends can account for 15 percent to 20 percent of the total return for shareholders, said Ken Leon of CFRA. “ ‘That is where they are drawing a strong line. A lot of investors own those stocks for those dividends.’ ”
Dividends now bear a rising political risk.
“Our view remains that dividend decisions carry political and policy risk for the big banks. Already, Democrats are attacking the big banks for failing to cut dividends,” Cowen Washington Research Group’s Jaret Seiberg writes in a note.
And he suggests the payouts could become untenable if banks take advantage of extra wiggle room federal regulators granted them last month to tap capital reserves they are ordinarily required to maintain as protection against a downturn. “Our concern is not that a dividend cut would be forced on the bank,” he writes. “Rather, we don't see how banks can politically explain how they have dipped into a capital buffer, but they still believe it is appropriate to pay common dividends. To us, you could see GOP attacks join the existing Democratic attacks on bank dividend levels if this happened.”
The Federal Reserve has given the banks cover.
Federal Reserve Chair Jerome Powell last week said he sees no reason why banks should halt dividends “at this time,” arguing they are “highly capitalized."
Already, some former regulators are arguing the industry’s Washington overseers should make the decision on the banks’ behalf by barring them from paying dividends and executive bonuses.
Noting that the Bank of England and the European Central Bank have already done so, former Federal Deposit Insurance Corp. chair Sheila Bair writes in a Yahoo Finance opinion piece, “Every dollar of capital a big bank distributes to shareholders and top executives is a dollar that does not support credit which struggling businesses and households need. Why hasn’t the Fed put banks under similar restrictions?”
Bair continues: “The Fed says it wants banks to expand lending capacity, but the safest way to do that is to require them to retain this capital. Loosening capital requirements, the Fed’s preferred course, expands lending but also weakens banks’ financial stability.
“To get through this crisis, our economy needs the combined efforts of government, business, and the financial system. To compensate their shareholders, banks could consider paying dividends in shares, which would not compromise their lending capacity. But they should suspend cash dividends and bonuses until this crisis is over. That would be a good way to prove to a cynical public that Wall Street is capable of putting the public’s interest above its own. Why the Fed does not require them to do so remains a mystery.”
Or as Sarah Bloom Raskin, a former Fed governor who was deputy treasury secretary in the Obama administration, puts it in an email, “The banks are perceived right now as having received regulatory relief, so the burden is on the regulators to explain why that laxity is justified in the context of the banks' continuing to pay dividends.”
Earnings season continues this morning as Goldman Sachs, Citigroup, and Bank of America all report their results.
Treasury orders Trump's name to be printed on stimulus checks.
This is an unprecedented decision: “It will be the first time a president’s name appears on an IRS disbursement, whether a routine refund or one of the handful of checks the government has issued to taxpayers in recent decades either to stimulate a down economy or share the dividends of a strong one.”
- Here's how it will work, per Lisa Rein: “The president is not an authorized signer for legal disbursements by the U.S. Treasury. It is standard practice for a civil servant to sign checks issued by the Treasury Department to ensure that government payments are nonpartisan. The checks will instead bear Trump’s name in the memo line, below a line that reads, ‘Economic Impact Payment,’ the administration officials said.”
- It will probably delay delivery by a few days. Two senior IRS officials tell Lisa the decision, finalized late Monday, will put off the mailing of the first batch of paper checks as the agency races to change computer code for the process. Treasury officials denied there will be a delay.
- Trump denied he wanted to sign the checks on April 3. See the video here.
The reopening debate
FEMA and the CDC's draft plan to reopen parts of the country: “A team of government officials — led by the Federal Emergency Management Agency and the Centers for Disease Control and Prevention — has created a public health strategy to combat the novel coronavirus and reopen parts of the country,” Lena H. Sun, Josh Dawsey and William Wan report. (You can read the full plan here)
“Their strategy, obtained by The Washington Post, is part of a larger White House effort to draft a national plan to get Americans out of their homes and back to work. It gives guidance to state and local governments on how they can ease mitigation efforts, moving from drastic restrictions such as stay-at-home orders in a phased way to support a safe reopening.”
- The core of the plan is broken down into three phases: “Preparing the nation to reopen with a national communication campaign and community readiness assessment until May 1. Then, the effort through May 15 would involve ramping up manufacturing of testing kits and personal protective equipment and increasing emergency funding. Then staged reopenings would begin, depending on local conditions. The plan does not give dates for reopenings but specified ‘not before May 1.’ ”
- The first priority is addressing child care: Specifically, the plan says, to ‘reopen community settings where children are cared for, including K-12 schools, day cares, and locally attended summer camps, to allow the workforce to return to work. Other community settings will follow with careful monitoring for increased transmission that exceeds the public health and health care systems.’"
Trump unveils his “Opening the Country” council. The list of business executives the president plans to consult “were some of the most prominent names of Wall Street and Silicon Valley,” the NYT's Annie Karni and Maggie Haberman report. “Those included Jamie Dimon, the chief executive of JPMorgan Chase; Stephen A. Schwarzman, the chief executive of Blackstone; Tim Cook, the chief executive of Apple; and Mark Zuckerberg, the chief executive of Facebook, who he implied would be acting as consultants to his administration." But at least one person on the list said the administration hadn't asked first and gave no heads-up on the announcement.
Some of the other top financial services executives the White House is naming, per Politico: Bank of America's Brian Moynihan; Goldman Sachs's David Solomon; Citigroup's Michael Corbat; Wells Fargo's Charles Scharf; Morgan Stanley's James Gorman; Paulson & Co.'s John Paulson; Citadel's Ken Griffin; Elliott Management's Paul Singer; Robert Smith of Vista Equity Partners; Abigail Johnson of Fidelity Investments; Mastercard's Ajay Banga; and Visa's Al Kelly.
Trump set off a White House scramble by claiming “total authority” over ending the shutdown: “The president’s claim, first conveyed in a tweet Monday morning and underscored at a White House news conference and subsequent social media posts, caught his aides off guard and prompted them to study whether Trump would have such authority in a time of emergency like the ongoing pandemic,” Seung Min Kim, Josh Dawsey and Brady Dennis reports.
“At a White House briefing late Tuesday, Trump offered conflicting statements about which entity had the authority to reopen, seeming to backtrack from his claim Monday but at the same time insisting the federal government would have the final say …Earlier in the day, Trump’s comments on reopening the nation were challenged by his presumptive Democratic rival this fall, former vice president Joe Biden, and also by prominent governors overseeing the public health crisis in their states such as New York Gov. Andrew M. Cuomo, who in his daily news conference Tuesday skewered at length Trump’s position as wildly off-base from the Constitution.”
The first big bailout
Airlines have reached a deal with the administration on coronavirus aid.
Ten major airlines have agreed to accept $25 billion in grants: “Treasury Secretary Steven Mnuchin said Tuesday that Alaska Airlines, Allegiant Air, American Airlines, Delta Air Lines, Frontier Airlines, Hawaiian Airlines, JetBlue Airways, United Airlines, SkyWest Airlines and Southwest Airlines have all indicated they would participate in the program, part of the $2 trillion economic stimulus program signed by [Trump] last month,” Lori Aratani and Ian Duncan report.
“Mnuchin’s statement did not include details of the agreement. However, individuals close to the discussions, who were not authorized to speak publicly, said under the terms of the deal 70 percent of the money would be given to the airlines outright and 30 percent would have to be paid back to the government. In addition, the government would be given warrants equal to 10 percent of the amount the carriers receive, these individuals said."
In the U.S.:
- The U.S. suffered its highest daily death toll to date on Tuesday, with more than 2,300 reported deaths. Total deaths in the U.S. now have surpassed 25,000.
- Trump says he will suspend WHO funding: “It is not yet clear how the United States will cut off money to the main international organization focused on fighting the pandemic, or whether Trump is setting conditions for a resumption of U.S. payments,” Anne Gearan reports.
- Covid-19 checkpoints targeting out-of-state residents draw scrutiny: “Law enforcement experts say such broad use of police — and in some cases the National Guard — roadblocks is extraordinary and unprecedented in the United States,” Luz Lazo and Katherine Shaver report. “It's also unconstitutional, some legal experts say, to impede citizens’ travel based on their license plate, even if they're eventually allowed across a border.”
- Testing still lags: “The number of coronavirus tests analyzed each day by commercial labs in the U.S. plummeted by more than 30 percent over the past week, even though new infections are still surging in many states and officials are desperately trying to ramp up testing so the country can reopen,” Politico's David Lim reports.
- Retail sales expected to hit record low: “U.S. retail sales likely suffered a record drop in March as mandatory business closures to control the spread of the novel coronavirus outbreak depressed demand for a range of goods, setting up consumer spending for its worst decline in decades,” Reuters's Lucia Mutikani reports.
- J.C. Penney explores bankruptcy: “J.C. Penney Co Inc is exploring filing for bankruptcy protection after the coronavirus pandemic forced the U.S. retailer to temporarily shut its 850 department stores, upending its turnaround plans, according to people familiar with the matter,” Reuters's Mike Spector reports.
- More bad news for Boeing: “Boeing’s commercial airline customers canceled 150 737 Max orders in March,” Christian Davenport reports. “During the first quarter of this year, Boeing saw a decrease of 307 commercial airplane orders. Of the 5,000 planes Boeing has on back order, more than 4,000 are for the 737 Max.”
- Dimon says companies might call employees back by the summer: “A rational plan to get back to work is a good thing to do, and hopefully it will be sooner rather than later,” JPMorgan Chase CEO Jamie Dimon said on a conference call with analysts, CNBC's Hugh Son reports. “But it won’t be May. We’re talking about June, July, August, something like that.”
Around the world:
- China's image repairing efforts are not going well: “The wave of skepticism, sometimes from nations friendly toward China, underscores the challenge facing policymakers in Beijing as they look toward the post-pandemic global landscape," Gerry Shih reports.
- Europe tries to figure out how to reopen: “While decisions to shutter schools, close borders and tell citizens to stay home came relatively swiftly, the considerations on lifting restrictions are slow and fraught, requiring an acceptance of an increased risk to public health. There are no established best practices for timing or sequencing,” Loveday Morris reports from Berlin.
Wall Street rallies even as dire economic forecasts continue.
Investors are not looking backward: “Instead, investors are focused on giant new lending programs from the Federal Reserve, trillions in stimulus from the government and the latest statistics on cases of the virus, which show some signs of leveling off or easing,” Bloomberg News's Steve Matthews, Sarah Ponczek, and Vivien Lou Chen report.
“This week traders’ eyes also are pointed at company earnings, and the forward guidance that comes with them, to help assess the pace of a rebound. Many are looking ahead optimistically and betting that some form of economic recovery will come into view soon as government officials plot how to allow companies to restart operations … The extreme bull case says there is no choice but to write off 2020 and focus instead on first signs of the recovery. That assumes, though, there will be a swift rebound in economic activity and little structural damage to the major corporations that make up the S&P 500 Index.”
- The Dow closed up 500: “The Dow Jones industrial average rallied 558.99 points, or 2.4 points, to 23,949.76. The S&P 500 climbed 3.1 points to 2,846.06 while the Nasdaq Composite advanced nearly 4 points to 8,515.74. The tech-heavy Nasdaq notched its first four-day winning streak since early February,” CNBC's Fred Imbert and Yun Li report.
- Amazon hit an all-time high: “The stock climbed nearly 22% this year despite the market sell-off. Tuesday’s gain pushed its market capitalization to more than $1.1 trillion,” CNBC's Maggie Fitzgerald reports.
Consumer staples are showing cracks: “A broad rebound in U.S. stocks is leaving behind shares of some supermarkets, household product makers and other staples companies that provided a haven in last month’s coronavirus-fueled selloff,” Reuters's Lewis Krauskopf reports. “The sector could stall if investors believe that unprecedented stimulus efforts from the Federal Reserve and more than $2 trillion in government bailouts can help the economy recover quickly from the damage caused by the lockdowns that have accompanied the coronavirus.”
Trump is claiming victory in the market's partial recovery from its recent lows:
The IMF is forecasting a long, difficult recovery around the world. “The International Monetary Fund on Tuesday said the coronavirus pandemic is causing the worst economic downturn since the Great Depression of the 1930s, as a return to normal activity in the United States appeared likely to take months longer than [Trump] has indicated,” David Lynch reports. “World output over the next two years will fall $9 trillion short of what was expected before the crisis, akin to having both the German and Japanese economies vanish, said Gita Gopinath, the fund’s chief economist.”
Obama comes off the sidelines.
This is Biden's most significant endorsement yet: “Joe Biden’s week-long rollout of endorsements from a series of boldfaced political names is intended to emphatically place him as the leader of a Democratic Party whose factions are newly allied against a common opponent: [Trump],” Sean Sullivan, Annie Linskey and Michael Scherer report.
“Biden won the public embrace of his most significant supporter yet: former president Barack Obama. In a video that served as part endorsement and part political blueprint, Obama called on Americans to unite in a ‘great awakening’ in November and attested that his former vice president ‘has the character and the experience to guide us through one of our darkest times and heal us through a long recovery.’ ”
- Other party leaders are expected to announce their backing soon: “Sen. Elizabeth Warren (D-Mass.), another former rival, plans to throw her support to Biden in the near future, according to a person with knowledge of her plans who spoke on the condition of anonymity because the person was not cleared to discuss those plans publicly. Hillary Clinton, the party’s last nominee, also is expected to back Biden soon, according to a person familiar with her thinking who also spoke on the condition of anonymity to discuss campaign strategy.”
Money on the Hill
Millionaires overwhelmingly benefited from a tax change in the coronavirus package sought by Republicans.
That finding comes from a report from a nonpartisan congressional body: “The provision, inserted into the legislation by Senate Republicans, temporarily suspends a limitation on how much owners of businesses formed as ‘pass-through’ entities can deduct against their nonbusiness income, such as capital gains, to reduce their tax liability. The limitation was created as part of the 2017 Republican tax law to offset other tax cuts to firms in that legislation,” Jeff Stein reports.
More than 80 percent of the benefits will go to those who earn more than $1 million annually, according to the Joint Committee on Taxation (JCT), the nonpartisan congressional body. “Suspending the limitation will cost taxpayers about $90 billion in 2020 alone, part of a set of tax changes that will add close to $170 billion to the national deficit over the next 10 years, [the JCT found].”
- March numbers for U.S. retail and industrial production are released
- Bank of America, Bed Bath & Beyond, UnitedHealth Group, Citigroup, Goldman Sachs, Morgan Stanley and Progressive are among the notable companies reporting their earnings
- The Labor Department releases the latest weekly jobless claims
- Abbott Laboratories, Honeywell, Rite Aid, Skechers USA and BlackRock are among the notable companies reporting their earnings
- Kansas City Southern is among the notable companies reporting its earnings