U.S. bank executives are eager to buy back their stocks at depressed prices, but regulators appear to be reining them in, showing a clear disagreement over how risky the financial world is today and how much banks need to conserve capital.
JPMorgan Chase & Co Chief Executive Jamie Dimon and Goldman Sachs Chief Financial Officer David Viniar lamented on conference calls in the past week that their companies are constrained from buying back more of their own shares.
Bank shares are trading at a steep discount to their book, or accounting, values, which means banks can instantly boost the value of their companies just by buying back shares.
I know that someday we are going to look back and wish we had bought back more at this price, Viniar said on Tuesday.
Banks' interest in buying back shares has increased this year as their stock prices have fallen. The repurchases have persisted through the third quarter, according to banks' latest financial reports.
Goldman said it repurchased $2.16 billion of its stock in the third quarter even as it lost $428 million for shareholders because of tumbling financial markets. JPMorgan spent $4.4 billion on buybacks in the quarter after earning $4.3 billion, much of which came from accounting gains.
But regulators are limiting what banks can do, because stock repurchases eat into capital. Dimon said Thursday that JPMorgan is not allowed to buy back any more of its stock through December under a plan approved by federal regulators earlier this year.
Viniar, pressed by analysts, declined to say how much more stock regulators would let Goldman buy this year under its plan. Big banks submit capital plans to regulators for approval early each year.
The banks are also being pushed to build up their capital to meet higher standards that will take effect in several years.
PAYING 78 CENTS ON THE DOLLAR
The benefit of stock buybacks to banks is clear. Goldman shares traded Tuesday around 78 percent of their book value. In other words, Viniar could get them at a discount to what is essentially Goldman's net worth.
Buying at 78 percent of book is like paying 78 cents for a dollar. The move would have enhanced the value of each of the remaining shares held by Goldman investors.
JPMorgan, if it had been permitted by regulators to buy more of its stock, could have bought its shares at 72 cents for every dollar of net worth. It would have been one of the best returns the bank could get for its money at a time when customer demand for loans is still weak.
In normal times, the answer is clear, these banks should be buying back their own stock, said James Ellman, a stock investor and portfolio manager at Seacliff Capital in San Francisco.
Warren Buffett is going that route. Berkshire Hathaway said last month it was launching a share buyback plan, because the market was undervaluing the company's shares.
That may be true for Berkshire Hathaway, but for banks the situation is cloudier.
The accounting value of banks was too high in 2007 before they started taking big write-downs, and book values may be subject to similar declines now. The fact that banks are trading at current levels would seem to indicate that the markets question book values.
When banks buy back their own stock they reduce the capital cushion, or safety buffer, they have against losses on their assets. Any capital reduction seems scary right now with Europe in the middle of a debt crisis, a weak economy, and only three years after the darkest days of a financial crisis.
The fact that these are not normal times was clear in the companies' own third-quarter earnings this past week.
JPMorgan's earnings were clobbered by a plunge in investment banking fees due to the market turmoil. Goldman Sachs posted its second-ever loss as a public company.
Viniar said afterward, We look at our stock price and we think it is extremely low and that it would be beneficial to our shareholders to be buying back stock at this price.
Analyst Mike Mayo of CLSA told Viniar that buying back stock is probably a better investment than some other things Goldman might spend money on. Viniar did not disagree.
There are at least three reasons for regulators to hold the banks back, said Seacliff's Ellman. Among them, the threat of losses from the European crisis, the uncertainty of how much the banks will have to pay for bad dealings in mortgages and the chance that the new Volcker Rule to limit certain trading will significantly erode their earnings power.
(Reporting by David Henry in New York; Editing Dan Wilchins and Richard Chang)