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The Fed Fires Not-Too-Subtle Warning Shot at Wall Street

Bernanke's caveat on QE

Wall Street breathed a collective sigh of relief back in March when most every big bank passed the Federal Reserve’s stress test, indicating they were prepared to withstand a “severely adverse” economic scenario without needing assistance from Uncle Sam and all who fill his pockets. A follow-up study released on Monday wasn’t nearly as optimistic.

While admitting banks had “considerably improved” their regulatory capital planning, the Fed fired a warning shot across the bow of Wall Street: it’s still not good enough. The biggest headliner of the report is that many of the 18 largest banks are still lacking in at least one of five areas critical to capital planning and risk management. The Fed didn’t specify which banks were falling short.

Several banks have inadequate capital planning policies and “less-than-robust” controls, according to the report.  But the main issue the Fed has appears to revolve around the way big banks are applying the stress tests. It seems their assumptions just aren’t realistic.

Banks assessed their risks too broadly, failing to recognize their own “idiosyncratic vulnerabilities.” But while doing so, they assumed unique advantages over other banks that they believed would suffer more in difficult economic conditions.

Some banks “assumed that they would be viewed as strong compared to their competitors in a stress scenario and would therefore experience increased market share.” Assuming market gains in a rancid economy does sound a bit unrealistic.

The end result of the study: the Fed believes banks should hold capital that goes well beyond regulatory minimums and their own internal targets. The Fed didn’t share any specifics, so this acts as more of a warning – a heads up for future policy.

Strict capital requirements are aimed to safeguard the economy, but they also hamstring banks. Tough news for Wall Street.

Diary of an IBD Intern (eFinancialCareers)

“It is scary how normal such long working hours become,” said our investment banking intern mole. “Your body, mindset and lifestyle all adapt remarkably quickly to the environment. And it fuels ‘typical banker’ behavior.”

J.P. Morgan King Once Again (Bloomberg)

J.P. Morgan has been ranked the No. 1 firm in U.S. equities research for the fourth consecutive year, according to Greenwich Associates. The top analyst team for 2012 was Credit Suisse’s Craig Siegenthaler and partner Howard Chen.

Goldman Tweets (GS)

Goldman Sachs has launched a new Twitter handle for career information, interview tips and other job materials. They were answering tweets as of yesterday.

Investment Banks Still Hiring (eFinancialCareers)

If you know where to look there are ‘pockets’ of hiring, with some investment banks focusing on bulking up particular divisions. Here are eight banks currently hiring.

When Will it Stop? (Reuters)

Never immune to controversy, J.P. Morgan is now being investigated for hiring children of Chinese officials in a presumed attempt to win business in Asia.

Traders Fleeing Brevan Howard (Bloomberg)

Following a less-than-stellar summer performance, Brevan Howard Asset Management is seeing an exodus of traders. At least a half-dozen have left since May.

The ‘SOBs’ are Winning (CNBC)

Hedge fund Bridgewater Associates’ plan to build a ridiculous new headquarters on an 850,000-square-foot waterfront property in Stanford, Conn., is being met with resistance. Very loud and abrasive resistance.

Sticking Swiss (Financial News)

Robin Osmond, the former global head of investment banking at HSBC and chief executive of LMAX, has joined UBS as its chief operating officer of corporate client solutions.

Buzz Around the Office

Talk Your Hat Off to Them (NPR)

Kasetsart University in Thailand was forced to apologize after asking students to wear “anti-cheating” hats. I’ll ruin the surprise. The “hat” is just two pieces of paper tapped to the side of a person’s head.

List of the Day: Career Hurdles

Most everyone trips over a career hurdle at some point. When you fall down, do this to pick yourself back up.

  1. Revisit your failure with objective eyes.
  2. Learn from those who survived theirs.
  3. Accept yours and move on.

(Source: The Daily Muse)

AUTHORBeecher Tuttle US Editor

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