Bank 'Stress Tests' Expose Cracks in Citi, BofA 14 comments
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Banks have until May 4 to appeal the results of the government's "stress tests" designed to determine whether they've hoarded enough capital to continue functioning. Already, the results seem to hint the financial crisis will continue. All of the 19 largest U.S. banks under scrutiny are expected to "pass" but that's not really the point. Some are still expected to be forced to raise new capital no matter their grade.
Which brings us to Bank of America (BAC) and Citigroup (C), two banks reportedly being urged by the government to raise capital. That the banks are undercapitalized is no big secret. Unfortunately, new concern for two institutions that have already taken a combined $95 billion in bailout money could increase the chances they'll come back for more. The longer their capital structures are questionable, the less chance the pair will be able to convince investors to come creeping back especially as the perception problems plaguing the sector remain firmly entrenched. Officials say they don't want the market to look unfavorably on banks required to up cash reserves, or to consider them insolvent. But that is unlikely.
At the same time, obfuscation surrounding bank credit quality continues. As the WSJ points out, there remains a possibility that the banks could "meet" their capital requirements by extrapolating future results based on recently massaged balance sheets. From the end of the WSJ article:
Some bankers are optimistic that the Fed will use their first-quarter numbers to predict their performance for the next two years.
That could inflate the banks' earning potentials -- and thus their capital cushions -- because many of the companies had strong first-quarter performances.
Analysts, investors and most executives say those results probably aren't sustainable.
Those first quarter numbers, remember, came care of a change to reporting rules, not surprise profits. Inflated forecasts based on inflated results. What would be new there?
As for sorting out which banks are still at risk consider the following from Martin Weiss, who warns that despite reassurances from the Fed that the Big 19 are well capitalized, his research shows:
None currently merit a rating of B+ or better, a level that we believe would generally correspond to capital levels well in excess of needed amounts.
Only three, representing 6 percent of the assets of the 19 — have a rating of B- or B, — considered “good.” They are Bank of New York Mellon, Capital One and State Street.
We consider eight institutions, representing 63 percent of the assets, to be at risk of failure. They are JPMorgan Chase, Citibank, Wells Fargo, SunTrust, Goldman Sachs, HSBC America, National City and Countrywide Bank.
Notice the number of "healthy" banks (Goldman, JP Morgan) on that list. Weiss says hefty ongoing exposure to derivative risk is part of the problem, and concludes both the stress tests and their results could be "very misleading."
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This article has 14 comments:
1) I will take this opportunity to say . . . (deep breath) . . .
I WAS WRONG. The Stress Test actually semi-failed two of the biggest institutions.
This makes me hope the Administration has decided that a few of the very the worst will be put through extra difficulties, to encourage the others.
I can dream.
2) Marty Weiss is the absolute gold standard when it comes to rating bank safety (I recommend his work to anyone, see thestreet.com), and I would take his warnings very, Very seriously. Add that to the fact that, as Tyler Durden reminds us, the failure of any two banks on that last list would empty the FDIC at a stroke, and you have the makings of a real . . . (let's see, how can i put this tactfully - ah!) Policy Challenge.
> jack
On Apr 29 09:23 AM kelm wrote:
> The Fed stated last week that they were looking for all banks to
> raise capital beyond the minimums and in doing so essentially pulled
> everyone into the "you need to do more" boat. That serves to muddy
> the distinction between passed and failed. Everyone sort of failed.
> As for how the market will react it may like it. Here we have a clear
> assessment and apparently some plans on how to raise the equity (preferred
> shares into common being one big part). Who knows, we could rally.
Oh geez! Is this another unworkable concept like "collective rights"?
"Notice the number of "healthy" banks (Goldman, JP Morgan) on that list. Weiss says hefty ongoing exposure to derivative risk is part of the problem, and concludes both the stress tests and their results could be "very misleading."
This makes me hope the Administration has decided that a few of the very the worst will be put through extra difficulties, to encourage the others."
"The Fed ... essentially pulled everyone into the "you need to do more" boat. That serves to muddy the distinction between passed and failed. Everyone sort of failed."
They're trying to break it to us gently--"us" being average citizens with bank accounts.
www.youtube.com/watch?...
"Article would be a lot more helpful if it contains detailed analysis of why Citi or Bac require additional capital. "
SO would the stress test itself. But we didn't get that either.
"Foxx-Pitt has issued a detailed analysis of why additional capital is not needed, and unless I'm reading it wrongly, capital is only needed if the stress test scenario is severe. However, I question the severity of the test using scenario like 12% unemployment as it would contradict what Bernake and company being saying about the economy."
Wow, not sure where to start there. Real unemployment is already over 12%. Goldman has a derivative position TEN TIMES it's capital base - pointless to say they Need capital, as they have no way of getting near enough.
And are you truly hesitant to contradict the manifest sophistry of Bernanke and company? The guy has convinced himself that he is an expert of the Great Depression, and is proving it to us by recreating it.
As a practical matter, how much capital a bank "needs" is ultimately based on the aggregate faith/fear of its creditors, which mostly means its depositors. Even if the Feds could predict that, I doubt they'd let themselves accept the verdicts.
What shareholder in their right mind thinks Ken Lewis has done a good job? Who would want him leading a company they are invested in?
It is no wonder they were ashamed to announce the results during the meeting. Now you have to question whether the board of directors is competent.
Damn, I wish they would get their act together, the lumps in my mattress makes hard to sleep at night.
Oh! I put the overflow in JPM. I'm a glutten for punishment, my last bank investment was wamu.