Climate models’ simulation of clouds over the eastern subtropical oceans contributes to large uncertainties in projected cloud feedback to global warming. Here, interannual relationships of cloud radiative effect and cloud fraction to meteorological variables are examined in observations and in models participating in phases 3 and 5 of the Coupled Model Intercomparison Project (CMIP3 and CMIP5, respectively). In observations, cooler sea surface temperature, a stronger estimated temperature inversion, and colder horizontal surface temperature advection are each associated with larger low-level cloud fraction and increased reflected shortwave radiation. A moister free troposphere and weaker subsidence are each associated with larger mid- and high-level cloud fraction and offsetting components of shortwave and longwave cloud radiative effect. It is found that a larger percentage of CMIP5 than CMIP3 models simulate the wrong sign or magnitude of the relationship of shortwave cloud radiative effect to sea surface temperature and estimated inversion strength. Furthermore, most models fail to produce the sign of the relationship between shortwave cloud radiative effect and temperature advection. These deficiencies are mostly, but not exclusively, attributable to errors in the relationship between low-level cloud fraction and meteorology. Poor model performance also arises due to errors in the response of mid- and high-level cloud fraction to variations in meteorology. Models exhibiting relationships closest to observations tend to project less solar reflection by clouds in the late twenty-first century and have higher climate sensitivities than poorer-performing models. Nevertheless, the intermodel spread of climate sensitivity is large even among these realistic models.