Stress Tests Were Never a Serious Exercise 25 comments
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According to a report late last night from Bloomberg, six of the nineteen banks that were stress tested by the Fed will need to raise additional capital. Two of the six are known: Citi (C) and BofA (BAC).* Both are appealing the ruling. The other four banks aren’t known, but SunTrust (STI), KeyCorp (KEY) and Regions Financial (RF) are believed to be among them according to a Morgan Stanley (MS) report cited in the article. Given its poor tangible common equity ratio, and high exposure to option ARMs, HELOCs and California in general, Wells Fargo (WFC) should certainly be included.
It’s unfortunate, but the whole exercise still feels like an excuse to direct additional taxpayer dollars to “systemically important” financials.
There were hopes that stress tests would force a proper resolution of troubled bank balance sheets. It would discover which banks truly need more capital and then force them to raise it properly, by wiping out shareholders and executing debt for equity swaps in order to reduce liabilities and rebuild equity.
But this was never a serious exercise. For starters, the “scenarios” by which balance sheets are being tested are far too rosy. House prices are falling faster, unemployment is climbing higher, and growth is decelerating quicker than the Fed and Treasury would like to admit. But this is inconvenient. Properly stressing the big banks’ balance sheets would demonstrate that most are insolvent. And insolvency can’t be solved with an extra hit of taxpayer cash. But if government can paper over losses long enough, it can continue the charade that this is all a temporary liquidity problem. Just one more fix of taxpayer cash can get banks through the crisis.
But after TARP, FDIC’s TLGP, half a dozen new lending facilities from the Fed, a second round of TARP injections, taxpayer guarantees to absorb losses at Citi and BofA, etc., no one buys the argument that the banks will be fine if they get just a little more help…
Now the administration will claim taxpayers aren’t supposed to provide additional capital this time around, that banks should go to private markets first and/or convert preferred to common before asking Treasury for more. But this is just misdirection. Private capital markets know that banks are insolvent, so they aren’t going to provide additional capital. As for converting preferred to common, yeah that will boost TCE, but it doesn’t actually ADD any capital to banks’ balance sheets. 67¢ cents of preferred equity + 33¢ of common equity = $1 of total shareholder equity. Convert all the preferred to common and you still have only a $1 of total equity. There’s no extra capital on the balance sheet to absorb losses.
This leaves taxpayers as the only source of incremental equity capital. Count on Wunderkind Geithner to find clever ways to deliver more of it to his buddies.
*According to a report from FBR, BofA needs to raise $60-$70 billion
FAIR DISCLOSURE: OA has short positions in companies mentioned in this post.
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Our President isnt smart enough to handle this job. He has to go.
Given that Bernanke said in 2007 that "the American Banks are well capitalized" and that Geithner said in Congress that the NY Fed did not supervise the banks I wonder who has been watching all these years.
But it seems like we the taxpayer. Give the feds the right, to give our tax money to these insolvent banks.
The banks in turn make money from us coming through their doors, with deposits ( which they encourage us to do) and buying their stocks.
Then the banks under the watchful eye of the FED's convert preffered stock to common.
The FDIC then steps in; closes the banks doors ( after hours) takes the liquid (stocks) from the insititution to prop up the failing FDIC. Then sells the bank with all the bad debt to one of it's pal's. And the process begins again. Am I really confused?
Great article I can sense the ire in the writers words. This banking bailout is all ridiculous. Where are the State Banking Auditors? Don't tell me hiding with the SEC
I've been reading this site off and on for a while now and have never, EVER, seem anything where the writers are upbeat and believe in anything other than the end of the world.
I really need to find a site that is similar but way less biased.
You guys always seem to have an agenda rather than just publishing a story.
The site is way too extreme.
It's like Lou Dobbs or Glen Beck.
Just sensationalism to get more eyeballs.
It would be cleverer to say, "... the USSA"
This will, of course, never happen.
That's what they are doing, invest accordingly. Is it fair? Is it globally good for us the outsiders? I frankly don't know.
Nobody complained when they guaranteed $ 100k/deposit (only in America), nobody complained when they were lending money like if there was no tomorrow. We are still in the same logic and have to live with it.
Amen. This, more than any other statement, depicts the circumstance in which Americans find themselves.
With all the financial "wizardry" of late--where is the ETF for double-shorting the taxpayer ? If Citi can book a big line item betting against their own viability, why can't Joe Taxpayer/Investor bet that he is going to get screwed into oblivion ?*
*[Or perhaps one should simply bet against Treasuries, and the USD (which are proxies for the taxpayer) by buying shiny metallic elements found in the middle of the periodic table.]
I didn't create this problem but after the screw job that's been perpetrated on us taxpayers I figure I might as well make some of the money back somewhere, this is as good a place to start as any.
The financial sector depends on and feeds on a nation addicted to exponentially growing debt. This debt dependent economy of ours that has evolved over the last 3 decades has been organized and dictated by the omnipotent central planning monopoly called the Federal Reserve. Look at the following graph to see how the Fed's long-term declining federal fund interest rates was the impetus and catalyst for fueling ever-increasing consumption with ever-increasing debt. This was not an interest rate dictated by a free market but by the market-intervening, central planning Federal Reserve.
mwhodges.home.att.net/...
Since 1981 -- at the same time when the Fed started it decades-long lowering of the interest rate, America's Total Debt ratio (to national income) of all sectors started exploding upward and outstripped actual economic growth many times over.
We can attribute the current economic collapse directly to the Federal Reserve. The current crisis has us borrowing from the Federal Reserve so we can pay it to “bail out” their member banks and which we then get to pay back to them with interest! They created these artificial boom cycles by increasing credit and the money supply. A true free market would have dictated a much higher interest rate that would have prevented the catastrophic housing bubble. A basic tenet of the Austrian School of Economics is that any government interference with markets will lead to distortions and inefficiencies in an economy. They also believe that the price of current consumption versus future consumption, that is, the interest rate, also must be allowed to be determined in a market free of government influence. Our current system does not allow this to happen. In other words, we don't have a true interest rate which gives the market a clear and true picture of supply and demand. A capitalist market cannot function properly if there is no true interest rate to direct it.
We have a financial sector that controls our government. The securities and investment industry contributed $53 million to congressional and presidential candidates in 2008, according to the Center for Responsive Politics. Is it any wonder that even after the overwhelming public outcry against the first proposed bailout in Sept 2008 and initial defeat by the House, the bailout eventually was rammed down our throat. Those Congressmen who had initially voted for the first bailout had received 54% more money in campaign contributions from banks and securities firms than had those who voted against it.
Our government and the Fed have worked in unison to produce this centrally planned, debt-based, market-manipulated economy with abnormal boom/bust cycles which has allowed the U.S. government to grow ever bigger and more intrusive by raising taxes ever higher and funding all sorts of conceits like wars and wasteful public projects. The U.S. government is now the largest it's ever been in history. Now the U.S. government and the Federal Reserve are busy trying to reinflate this corrupt system.
So you see, we are hostage to this current system that serves the politicians and the financial elite, but not the people of this country. "The government that governs least governs best." - Thomas Jefferson
On Apr 29 07:49 AM Speedspirit wrote:
> The banks should not be nationalized but declared bankrupt along
> with the Fereral Reserve and put into recievership. Painful but who
> is liking the direction this is going. Rip the band aid off and disinfect
> the wound. Or we will die of blood poisoning.
> Our President isnt smart enough to handle this job. He has to go.
>
All I see is that American politicians are like any other Latin American politic who are constantly steeling from peolple's money...
However, in Latin America we stand up and protest against corruptions as you do nothing and let them take all your money and the future of your childern...
Welcome to reality!!!