with Brent D. Griffiths

The Federal Reserve is declaring a temporary timeout on moves by the biggest banks to reward their shareholders.

Pointing to the ongoing economic turmoil unleashed by the coronavirus pandemic, the Fed concluded its annual stress test of the industry by capping bank dividends and barring them from resuming stock buybacks through at least September.

It found the nation’s 34 biggest banks performed well under the pre-pandemic scenario for an economic shock the central bank used to perform part of the test.

But the scale of the ongoing crisis has already dwarfed conditions laid out in that February hypothetical. And a test the Fed added to evaluate how the banks would hold up under different kinds of recoveries revealed weaknesses.

If the recovery is sharp and swift, the banks will preserve enough of their capital cushions to remain sound, the Fed found. 

But “under the U-shaped or W-shaped alternative downside scenarios, a number of firms could experience significant capital depletion and several would approach minimum capital requirements,” it said

Some say the Fed’s restrictions don’t go far enough.

The central bank’s decision to impose dividend caps and suspend buybacks marks the first time since the Great Recession it has stepped in to dictate how big banks spend their capital, Renae Merle notes. The Fed is also requiring them to update and resubmit their capital plans later this year in light of the vastly changed economic landscape.

But advocates of stricter regulation dismissed the moves as half-measures. They included Fed governor Lael Brainard, an appointee of President Obama, who objected to the decision to allow the banks to continue paying dividends at all. Brainard wrote given the crisis, big banks should be preserving capital, not shrinking it: “This policy fails to learn a key lesson of the financial crisis, and I cannot support it.”

Daniel Tarullo, the former Fed governor responsible for crafting much of the financial industry’s post-crisis regulatory framework, was similarly critical. Tarullo, who was also appointed by Obama, wrote the latest stress test failed to fulfill its founding purpose to ensure the banking system’s resiliency and instead is turning into “little more than a compliance exercise.”

And he took the Fed to task for releasing bank-by-bank results for the first test but only aggregate results for the additional one. “So we have full information about a largely irrelevant stress test, but limited information about the relevant analysis,” he wrote in a blog post for the Brookings Institution.

It could be the Fed is simply playing for time amid a highly volatile situation. That’s what Cowen Washington Research Group’s Jaret Seiberg argued, after concluding the stress test results were “likely to disappoint all sides.”

“We believe the Federal Reserve has bought itself a quarter to figure out whether it must take more serious action against the big banks or if the economy will recover enough that it can let banks continue paying common dividends,” he wrote in a note.

Investors flinched at the results.

They focused for most of the day on the other big news on the banking regulatory front: The move by the Federal Deposit Insurance Corp. to roll back the Volcker Rule, making it easier for big banks to participate in certain investment funds. The FDIC also scrapped a requirement that banks have to hold collateral for derivatives trades between affiliates of the same firm.

Shares of big bank stocks — including Bank of America, Goldman Sachs, JPMorgan Chase, and Wells Fargo  — surged on that news. But all dropped in after-hours trading after the Fed published the stress test results. 

Coronavirus fallout

Another 1.48 million workers are newly unemployed.

It's the 14th straight week more than a million people have filed for jobless claims: “The news that another 1.48 million people applied for unemployment for the first time last week — the 14th straight that more than 1 million people filed for unemployment — was yet another reminder of the magnitude of the economic crisis. For three weeks straight, the number has hovered around 1.5 million, pointing to the potential stubbornness of the recovery,” Eli Rosenberg and Abha Bhattarai report.

From Heather Long:

From Bloomberg's Joe Weisenthal: 

More from the U.S.:
  • U.S. sets another single-day record for new cases. “Across the United States, 39,327 new coronavirus infections were reported by state health departments on Thursday — surpassing the previous single-day record of 38,115, which was set on Wednesday,” The Post reports. “Texas, Alabama, Missouri and Nevada reported daily highs. The death toll also spiked, to about 2,500, as New Jersey added 1,854 probable deaths to its overall tally.”
  • Several states pause plans to reopen. “Governor Greg Abbott halted the reopening of the Texas economy, as Houston runs out of intensive-care beds for Covid-19 patients and the workers needed to trace their contacts. North Carolina also paused plans to loosen restrictions this week, along with Louisiana and Kansas,” per Bloomberg
  • CDC chief says coronavirus cases may be 10 times higher than reported: “The number of people in the United States who have been infected with the coronavirus is likely to be 10 times as high as the 2.4 million confirmed cases, based on antibody tests, the head of the Centers for Disease Control and Prevention said,” Lena H. Sun and Joel Achenbach report.
  • Rise in foot traffic competes with virus upswing: “Data from cellphones, time clocks, and top economic forecasters all pointed toward a steady rebound in economic activity last week, and one that began to include sectors initially left out as too risky because of the proximity among customers and staff and the patchy enforcement of mask-wearing and other safety measures,” Reuters's Howard Schneider reports.
From the corporate front: 
  • Macy's slashing 3,900 jobs, roughly 25 percent of its corporate workforce: The layoffs announced come just months after the beleaguered retailer announced it would close 125 stores — about a fifth of its total — and shed 2,000 positions after a disappointing holiday season. The company also is scaling back staffing at its Macy’s and Bloomingdale’s stores, distribution facilities and customer service centers, but says it will ‘adjust as sales recover,’” Abha Bhattarai reports.
  • Apple to close 14 stores in Florida: That brings the company's total re-closures to 32 stores in the United States, Reuters's Stephen Nellis reports. “Last week, it announced a round of shuttering in Florida, Arizona, South Carolina, and North Carolina.”
Around the world:
  • Lufthansa soars after top shareholder backs bailout: “Lufthansa shares jumped as much as 20 percent … after its top shareholder dropped his objections to a 9 billion euro ($10 billion) government bailout for the German airline brought to the brink of collapse by the covid-19 pandemic,” Ilona Wissenbach and Edward Taylor report. “His endorsement amounts to an 11th-hour reprieve for Germany’s flagship airline after fears had swirled he might veto the proposed rescue, which will see the government take a 20% stake and board seats, diluting existing shareholdings.”

Latest on the federal response

Treasury sent more than 1 million stimulus payments to dead people. 

Congress's independent watchdog totaled nearly $1.4 billion in such checks, Erica Werner reports. The GAO said that the payments to dead people came as Treasury and the IRS rushed to disburse some 160.4 million of these payments totaling $269 billion after the Cares Act was passed in March. The problem relates partly to the fact that, while the IRS has access to the Social Security Administration’s full set of death records, the Treasury Department and its Bureau of the Fiscal Service — which actually issue the payments — do not, the GAO said."

No big deal, analysts say. The sum represents a fraction of a percent of the program, several noted. And emergency programs should be erring on the side of spending too much. 

From former Treasury economist Ernie Tedeschi:

From AEI resident fellow Kyle Pomerleau:

Dunford being eyed to chair Congressional Oversight Commission.

The Cares Act oversight creation has been plagued by delays: “Former Joint Chiefs of Staff Chairman Joseph Dunford is the leading contender to chair the Congressional Oversight Commission, a key oversight mechanism for the Cares Act that has been leaderless since the legislation passed in March …,” Erica Werner reports.

“Under the terms of the Cares Act, the commission chairman is a joint pick made by House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Mitch McConnell (R-Ky.). The two have struggled to come to agreement on an individual who would be acceptable to both parties and also not have conflicts of interest that would preclude taking the position … This year Dunford was elected to the board of Lockheed Martin; it’s unclear if he’ll be able to maintain that position while serving as chair of the oversight commission.”

Market movers

Nike reports unexpected loss as sales tumble.

It shows the pandemic hits even retail giants: The Portland, Oregon-based sneaker maker “reported an unexpected quarterly net loss and a sales decline of 38 percent year-over-year, as its business was hurt from its stores being shut temporarily, and online revenue was not enough to make up for that," CNBC's Lauren Thomas reports.

“Its inventories also piled up, weighing on profits, as its wholesale partners such as department stores also had their shops shut and took in fewer orders for shoes and clothes. Nike shares were recently down around 4 percent in after-hours trading.'

Disney shares drop as company delays reopening of Disneyland: “Shares of Walt Disney Co dropped 1.8 percent after the media company delayed the reopening of theme parks and resort hotels in California …,” Reuters's Helen Coster and Akanksha Rana report.

“The reopening of Disneyland Park and Disney California Adventure Park that was earlier scheduled for July 17 will be delayed until Disneyland receives an approval from state officials, the company said.”

Trump tracker

SEC's Jay Clayton says he sought SDNY move.

Clayton revealed some previously unknown details about last week's unexpected news: Securities and Exchange Commission Chairman Jay Clayton said “that he first spoke two weeks ago with Trump administration officials about becoming the top federal prosecutor in Manhattan and defended his credentials for the job,” the Wall Street Journal's Dave Michaels reports.

“Under repeated questions from Democratic lawmakers at a House hearing, Clayton revealed some previously undisclosed details about the Trump administration’s decision to nominate him as the next Manhattan U.S. attorney. Clayton would succeed Geoffrey Berman, who was removed last week from the job by [Trump] at Attorney General William Barr’s request. House Democrats pressed Clayton … on his ties to Trump and whether he could lead the country’s most prominent federal prosecutor’s office in an independent fashion. Clayton acknowledged golfing with Trump ‘a handful of times,’ but said all of his enforcement decisions at the SEC have been unswayed by political concerns.”

Protest fallout

Verizon is pulling advertising from Facebook and Instagram.

The social media giant continues to lose business amid pressure from activists: “Facebook’s stock was down nearly 2 percent last night,” CNBC's Megan Graham reports.

“Last week, a group of six organizations called on Facebook advertisers to pause their spending on the social media platform during the month of July. The groups -- the Anti-Defamation League, the NAACP, Sleeping Giants, Color of Change, Free Press and Common Sense -- asked 'large Facebook advertisers to show they will not support a company that puts profit over safety.' According to marketing analytics company Pathmatics, Verizon spent an estimated $406,600 in Instagram ads between May 22 and June 20. The firm said Verizon spent $1,460,300 on Facebook in that same time period.”

Disney's Splash Mountain is getting a new theme: “Out: the controversial 1946 movie ‘Song of the South,’ which the company refuses to even show because of content that has been decried as racist. In: ‘The Princess and the Frog,’ Disney’s first animated film featuring a black princess,” Hannah Sampson reports.

“The [blog post announcing the change] did not directly address recent controversy, but said the change had been in the works since last year.”

When superpowers collide

White House considers broad intervention to secure 5G.

The administration continues to target Huawei: “The ideas, discussed intermittently with U.S. tech giants, private-equity firms and veteran telecom executives, include prodding large U.S. technology companies like Cisco Systems Inc. to acquire European companies Ericsson AB or Nokia Corp. … In more than one case, they said, the company wasn’t interested in buying into low-margin businesses,” WSJ's Drew FitzGerald and Sarah Krouse report.

“Policy makers have also discussed shoring up Ericsson and Nokia with tax breaks and export-bank financing, or supporting a private-equity group that would take one of the European equipment makers private. Other proposals would support “open” network technology that would make it easier for U.S. startups to develop new technology for 5G equipment. The ideas show how far the U.S. is willing to go in its fight with China over who will supply the world with advanced technologies.”

Campaign 2020

Wall Street is bracing for President Biden.

Trump's dip in the polls raises questions about the future: “The changes in tone and expectation – and, in some cases, preparation for a Biden presidency – represent an about-face for many executives who privately cheered on Trump’s cuts in corporate and income taxes, along with his rollback of regulations. Many of them have traditionally projected more moderate leanings in public settings,” CNBC's Brian Schwartz reports.

“The preparation for a Biden presidency ranges from privately warning clients and affluent friends that their taxes will soon be going up, to veteran executives speaking to people linked to Biden out of hopes they can have access to the White House. Others are donating more to Biden’s campaign.”

Pocket change

Jack Abramoff is going back to jail. NYT's Nathaniel Popper: "Jack Abramoff, the disgraced lobbyist whose corruption became a symbol of the excesses of Washington influence peddling, is set to return to jail for violating the law that was amended in response to his earlier crimes, law enforcement officials said on Thursday.

“Prosecutors said Mr. Abramoff, 62, is the first person charged with flouting the Lobbying Disclosure Act, which was amended in 2007 after details of his earlier scheme, one of the biggest corruption scandals in modern times, emerged. He pleaded guilty to the lobbying violations and to criminal conspiracy for secretive and misleading work he did on behalf of cryptocurrency and marijuana projects, according to court documents.”

Albertsons pulls off downsized IPO.

The supermarket has been trying to go public for years: The $800 million initial public offering (IPO) “was the culmination of multiple attempts by its private equity owner Cerberus Capital Management LP to cash out,” Reuters's Joshua Franklin reports.

“Cerberus has been an investor in Albertsons since 2006 and has been trying to take the company public since 2015. The grocer’s anemic growth had faced pushback from IPO investors, as well as shareholders of Rite Aid Corp, the pharmacy chain it tried to merge with two years ago. The pandemic buoyed Albertsons’ fortunes, however, as consumers stocked up on food while staying at home. Albertsons’ sales in March and most of April were up 34 percent from last year. Yet the scaling back of the IPO on Thursday indicates that some investor skepticism lingers."

BlackRock cuts fees for its largest ETF fund: “The New York investment giant disclosed it cut the price investors pay for an ETF that tracks the S&P 500 to $3 on every $10,000 invested, from $4. The price of BlackRock’s fund now matches Vanguard’s version,” WSJ's Dawn Lim reports.

“With roughly $195 billion in assets, BlackRock’s iShares Core S&P 500 ETF is an iconic fund in the firm’s lineup, the second-largest ETF to be tracking the S&P 500 index after the SPDR S&P 500 ETF Trust of State Street Global Advisors.”

Chart topper

The New York Times mapped the explosion in new coronavirus cases over two weeks in mid-June: 

The funnies

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Bull session