How Stressed Are U.S. Banks?

U.S. regulators are beginning “stress tests” on the top 19 U.S. banks, and investors are braced to see what happens.

Appearing before the House Financial Services Committee, Fed Chairman Ben Bernanke would not comment directly on the financial health of Citigroup (C), saying in essence that regulators are waiting to see how their stress test “works out.”

In testimony before the Senate Banking Committee Tuesday, Bernanke reassured lawmakers that regulators were not eager to nationalize troubled banks.

How much more we’ll have to do depends on the state of the banks, it depends on how the economy evolves and it depends on the margin of safety we think we want to have.

Though JPMorgan Chase (JPM) said it wasn’t pressured by regulators to cut its dividend to 5 cents per share from 38 cents per share, Gimme Credit’s Kathleen Shanley posits that the move on Monday was well-timed:

Overall, the bank’s move appears well-timed to ensure that the company passes its stress tests with flying colors despite deteriorating trends in products such as credit cards.

CreditSights illustrates what government help might look like in both the conservative and worst-case scenarios under the Obama Administration’s newest bank bail-out proposal in “Supervisory Sphinx Spits out More Solutions”:

Meanwhile, PIMCO’s Bill Gross said in a new commentary that he would not dispute the need to “further capitalize systemically important banks via convertible bonds held by the government,” even though it would dilute existing shareholders.

But to those proponents of nationalizing the U.S. banks as Sweden did during the 1990s, such as NYU Professor Nouriel Roubini and former Fed Chairman Alan Greenspan, Gross says:

The U.S. isn’t Sweden, and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks but we have 7,500… if you thought Lehman Brothers was a mistake, just stand by and see what nationalizing Citi or B of A would do.

Gross predicts it will take “trillions” of dollars in the U.S. alone to make up for the loss of private credit, as well as a high degree of policy coordination among nations.

All of the angst and market volatility over the bank stress testing might have been prevented, to some degree anyway, had the U.S. Treasury said from the beginning what it finally announced Wednesday afternoon.

According to Bloomberg, the stress tests will be completed by the end of March and banks will then have six months to come up with the required additional capital needed.

Comments

[morph366]

The comment from Bill Gross that you included seems to be a non-sequitur.
Lehman Brothers wasn't nationalized it went bankrupt so why would one want to draw parallels between a bankruptcy and nationalization. Just goes to show how there appears to be confusion and too much emotion over nationalization even from a luminary such as Bill Gross.
It's not that I am advocating nationalization but why not have a grown up debate about it

2009 Feb 26 10:12 AM

[Sentinel]

Simple.....

Every bank functions under fractional reserve banking. Most if not all banks are interconnected. ALL BANKS are affected by the psychology of the masses.

Now....there was 400 trillion dollars of derivative valuation. Most of that was fake. Even if 5 % was real (a low ball estimate) then that is 20 trillion dollars. That's more money than the combined assets of the Top 20 U.S. banks.

Even if some of those banks are not that exposed to derivatives, it does not matter. Because of fractional reserve banking practices ALL are subject to runs when market psychology breaks down which has been happening.

Of course, that's just the derivative picture. This does not include the Commercial Real Estate collapse and the Credit Card Default Crisis. This adds hundreds of billions of dollars of more stress to a system designed NOT to have a lot of money in the vaults.

Fractional Reserve Banking was never designed for the Perfect Storm that we have now.

But hey....if you don't believe me then throw most of your life savings into the banks now....hellava buy looking at their stock prices.

2009 Feb 26 10:12 AM

[CautiousInvestor]

Bill Gross is a very bright guy but it would be a surprise for him to say that he would favor any form or shape of nationalization as bondholders could take a hit. This would be at odds with the interests of PIMCO.

One other point of clarification. Since the shadow banking system has been effectively removed from the financial landscape, Gross maintains that the feds have to supply as much capital as was provided by hedge funds and SIV's to maintain lending levels of the past.

This is completely different from what will be required to keep the banks afloat. Today Obama announced that the new budget would include an additional $250 billion to fund increases in CAP. Actual outlays, though, will be $750 billion with the expectation that $500 billion will be reovered.
This may or may not be enough.

2009 Feb 26 10:26 AM

[Sentinel]

Oh yeah...almost forgot.....

Some of these banksters have already said that they are ill-prepared for unemployment to reach 8-10%.

Why?

As they explained they have models which show a cascading effect of defaults from mortgages to Commercial Real Estate to car loans to credit cards, etc. when that many people hit the skids.

Look for everything to go WAY south by April leading into the Summer of Hell.

2009 Feb 26 10:31 AM

[Harry Tuttle]

This looks like more of the same. Paulson also had plans. They were all based on the premise that "recovery is around the corner." In addition, Geithner et al continue to show extreme reluctance to wiping out the shareholder-managers.

The problem is hard enough without having to optimize so many variables. In my opinion, the system will be better off once they decide to see reality for what it is. It is far cheaper to nationalize and split Citigroup than to try to inject capital until the managers can make money again on their shares. Notice that I did not say "impossible", just much cheaper.

2009 Feb 26 11:10 AM

[Mr. Cynical]

Sentinel, You may be interested in this article from Steve Keen (from David Merkel):
www.debtdeflation.com/...

Keen claims, quite persuasively, that the fractional reserve banking system has been taken over by a credit system.

Also, I find Naked Capitalism's recent posts regarding the ineffectiveness of the stress tests important to note.

2009 Feb 26 11:24 AM

[Mad Hedge Fund Trader]

So nationalize the banks already! Get it over with! Call it whatever you want: partial nationalization, temporary nationalization, socialization, liverwurst, or rutabaga. Just get it over with! This tortuous slow drip of on again, off again, stop gap measures is going to cost us more than if we executed the politically incorrect “N” word. Of course, a government takeover is the worst nightmare for many Republicans. But now that former Fed governor Alan Greenspan and many fiscal conservatives are on board, this shouldn’t amount to political suicide for Obama. The FDIC’s Sheila Bair already does this on an almost daily basis with smaller regional banks, like Washington Mutual, but for some reason the top nine “too big to fail” banks are sacrosanct. Their deposits have been effectively nationalized with government guarantees since last fall. The market is already selling us that many of these once hallowed institutions are now worthless. This is what Citigroup (C) at $1 and Bank of America (BAC) at $2 are telling us. Just wipe out the pitifully little the common shareholders have left, clean them up, and resell them in five years after the credit markets are restored. Every government that ever did this, like the UK in the eighties and Hong Kong in 1998, made a fortune. I was involved with both, and serious coin was made by the sellers and the buyers. Not to drive a stake through the hearts of these de facto “zombie” banks really would risk a Great Depression II and an “L” shaped lost decade. The markets would love decisive and surgical action like this and rocket.

2009 Feb 26 12:12 PM

[Seen All It Before]

Nationalize is not a recognized legal term in banking law. The closest term is conservatorship, where the government operates the bank until a buyer is found. Receivership is analagous to the term bankruptcy when the primary regulator determines that there is insufficient capital and then hands it over to the FDIC to liquidate. Both Conservatorship and Recievership wipe out any shareholder interest or rights.

2009 Feb 26 12:24 PM

[ReversethinkerMN]

Why is the mainstream financial media shying away from writing about the derivatives exposure?

2009 Feb 26 09:47 PM

[vaughn]

Folks, give it up. Nationalization is not going to happen, as expressed by Bernanke and Geithner in almost plain English. Do not expect CDS payout via nationalization.

Stress test is a political message to reinforce too big to fail policy. The goal of the stress test is to determine how much capital that too big to fail banks need. It is reported that some banks are complaining that they should have received bigger capital injection cause the capital is cheap, really cheap. Only 5%, comapred to the 10% paid by Goldman Sachs for Buffett's capital.

Look at Obama's budget proposal. Another 750 billion will be ready just in case too big to fail banks need it. Well, you might resent the too big to fail policy. But consider the following : The too big to fail bank is kind of like ship, and everyone in the USA is the passenger aboarding the ship. while we may dislike the captain of the ship, but we simply cannot sink the ship to show our displeasure. Man, the water is below freezing and you cannot even survive for 5 minutes in the water.

2009 Feb 27 12:06 AM

[PainfullyAware]

"Since the shadow banking system has been effectively removed from the financial landscape ...."

When did this happen? I have not seen or heard any information that would lead me to conclude as you do. From the information I have read the "Shadow Banking" has been put into stasis. One week before Halloween 2008 they changed the accounting rules to do so. The "value it as you see fit" accounting for this mogul was implemented to buy time.

The "Shadow Banking" is the reason that no one will lend to each other. It is the reason for the uncertainty and why the FED has become the lender of last resort.

Until time matures the contracts associated with it or there is some meaningful action taken to resolve it - We Will Not Have Any Large Velocity Of Money In The System and thus we will continue to atrophy.


Treat The Disease Not The Symptoms.



On Feb 26 10:26 AM CautiousInvestor wrote:

> Bill Gross is a very bright guy but it would be a surprise for him
> to say that he would favor any form or shape of nationalization as
> bondholders could take a hit. This would be at odds with the interests
> of PIMCO.
>
> One other point of clarification. Since the shadow banking system
> has been effectively removed from the financial landscape, Gross
> maintains that the feds have to supply as much capital as was provided
> by hedge funds and SIV's to maintain lending levels of the past.
>
>
> This is completely different from what will be required to keep the
> banks afloat. Today Obama announced that the new budget would include
> an additional $250 billion to fund increases in CAP. Actual outlays,
> though, will be $750 billion with the expectation that $500 billion
> will be reovered.
> This may or may not be enough.
>

2009 Feb 27 02:03 PM