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Columbia Law School professor John Coffee on his predictions regarding the Fed’s stress test and bank volatility.
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Up about 23%.
And then KBW.
Up 24.
Per cent.
That's the feeling right affiliate bank index but today's release of the Fed's stress test results may create some additional volatility in bank stocks in the days to come.
Here's what investors are concerned about.
The Fed came out with the two step approach saying first you get to release the -- we'll let you know that you passed.
Second you tell us what you want to do with your dividends and with your share buybacks.
But you can't announce that until a week later.
Little strange -- -- may create some headaches for bank executives analysts and -- the shareholder we thought we'd bring in John Coffee Columbia university law school professor.
Joining us now from NY New York in Fox Business exclusive and -- okay let's get right to a professor thank you for being here as it.
In less than an hour and a half -- going to get these stress test results and the Fed -- this suggestion is not an order but it was a suggestion that yes you guys will find out what the pastor failed.
But now you have to wait until you let the world in the shareholders know what you wanna do with the capital you have as far as keeping it back why is that a problem why are you worried.
Well they're separating the good news from the bad news.
It's widely predicted by many analysts today.
That these major eighteen banks will cast distressed to -- -- 'cause 'cause for well didn't pass plastic -- -- -- time for did not pass some -- for.
Are the ones that may have the greatest volatility.
Because even if you pass the test.
It does not follow that the Fed will approve your projected dividend -- -- buybacks.
That's really -- -- years.
For this good news to really benefit investors the banks have to be able to increase their payouts which in the case of the Citicorp has been very very lowered.
Zero point 1%.
There however the Fed may well say.
In the case of some of the weaker banks have Citicorp for Bank of America that we want should be accumulate more capital even though you passed the test and we don't yet want to to increase should dividend payouts.
That's where there is uncertainty I think there's little doubt.
That it JPMorgan Nora Wells Fargo are strong and will be permitted to increase their payout but there's more uncertainty about those banks -- didn't do well let's start.
OK so let me pinpoint this year if Citigroup passes and we've got to figure they don't make the same mistake twice.
Because they failed the last time -- the -- it could you not say we failed to say we didn't pass.
What ever I mean that -- I was a little was our last time around but.
It would you expect that their shares gyrate because people are beginning to wonder what they will do about that as you mentioned very appropriately.
They want to see better dividend from city and who else would follow that same rock admiral -- when it comes to the shares in the short term.
Well of course W volatility and also there may be negotiations the Fed can him there can be body language.
Telling a major bank what the Fed is happy with in the way of a projected dividend increased.
And that's why they may want to separation.
So they have more time to try to influence and negotiate the bank's policy.
Do you expect leaks.
Or is that a really dumb question there will be -- I would suspect he'll be report still be projections what analysts would make -- bet on the Syria but if you hear that they all pass.
I think that analysts are still not going to be certain.
Where -- -- of the weaker warms to Citicorp's in particular are going to be able to make a significant increase some perhaps but a significant increase.
That's a very open question.
For the didn't pass they were ally financial's sun trust Citigroup and MetLife.
Can I just get your perspective you think -- -- those four have have fixed their situations fix their balance sheets and will get it right this time.
Well MetLife is no longer in the group -- sold -- its bank it's no longer covered that was its response to this problem.
The other is I can't tell you that I know anything about several him.
I was expected Citigroup has worked very hard to try to -- itself in the position work increase at least somewhat its dividend payout.
While I have you professor.
There is still a lot of question about Dodd-Frank about the Volcker Rule about whether too big to fail has indeed been not eliminated and on top of that meaning.
Taxpayer bailouts -- something happens.
And and they say absolutely the too big to fail has been eliminated but I just wonder if that if the JPMorgan then there's no reason to believe it would get into trouble but we saw what happened with the London whale back in April a year ago.
If the JPMorgan found itself in trouble you're telling me the Treasury Secretary in 24 hours would break up that bank.
No I don't think he can mean resolution authority which is what you just -- referring to is very difficult to trigger and I don't think it's can be that's feasible.
The other hand the Federal Reserve is restricted its old powers by which you could bail out that bank no longer exist there were taken away the bank Federal Reserve could only provide support based on very good collateral.
So we're caught in the world where bailouts may not be permitted but no of the rescue as -- there's still a real danger of potential connect contagion.
Because of you can't be bailed out the failure of one starts very wall of falling dominos.
Gotta go yes or -- are some of our banks still to pick.
By the gets a very decent question my problem is -- even if you made them smaller they would still be too interconnected and -- risk correlated.
So that the failure won't won't trigger the mall I think you're right I think the right.
