Stress Test Leaks: Endgame Emerging 35 comments
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It’s a leak free-for-all ahead of the stress test release, and it’s a little difficult to sort out what’s going on. Citigroup and Bank of America are apparently asking the government to conclude that they need no new capital while simultaneously looking to raise upwards of $10 billion each. Meanwhile the administration is preparing to release more detailed information than had been anticipated, but we also have a senior government official saying, “None of these banks are insolvent,” according to the tests.
But it actually seems to me that an endgame is emerging. As Warren Buffett says, the market is increasingly confident in banks not named Citigroup (I’d add Bank of America). The administration probably wants to use the stress tests to sound the all clear for most of the nation’s big banks, helping them to recapitalize primarily from private sources. The tests will show that Bank of America and Citi are “solvent,” but their capital needs will be sufficiently great that private sources of funding will be thinner. And then the fun begins. Here’s David Leonhardt:
The banks whose reserves are judged insufficient — Bank of America, Citigroup and a few regional banks lead the list of likely suspects — will be given six months to shore up their position, before being required to accept government money. The most obvious ways to do so will be to find new investors willing to buy a stake or to persuade existing owners of preferred stock (which is akin to a loan) to renegotiate their stakes.
Another possibility is that the government may encourage significant cost-cutting. That could lead to layoffs and leave some of the world’s largest companies far smaller than they once were. Last week, Citigroup agreed to sell a brokerage firm to a Japanese financial group, largely to raise capital.
And Francesco Guerrera:
Citi is believed to be considering a plan to convert more than $15bn in trust preferred shares – a hybrid of debt and equity – into common stock. Since trust preferred shares are held by non-government investors, this conversion could enable the authorities to inject further funds into the bank without raising its stake beyond the 36 per cent it has already agreed to buy. People close to Citi say it would have to force holders of trust preferred shares to convert them into common stock, which ranks below those securities and does not pay a yearly interest rate, by threatening to stop paying interest if they reject the offer.
This looks very similar to the approach to the automakers. Give the problem banks deadlines. Prop them up in the mean time while encouraging them to slim down and squeeze stakeholders, and generally lay the groundwork for something like a bankruptcy (or receivership). The six month deadline could explain why Geithner isn’t that upset about Barney Frank’s slow moving on the regulatory reform bill in Congress (which would include procedures for receivership).
The big question to me is where this leaves PPIP. Hank Paulson eventually gave up on asset purchases after concluding that he didn’t have enough dough to do equity stakes and purchase assets in sufficient quantity to make a difference. I wonder if Geithner isn’t moving the same way, thinking that a clean bill of health will let markets do the recapitalizing of most banks, allowing Treasury to keep its remaining TARP money for the really sick banks.
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You are correct !
Jay Boy Billy
On May 04 07:54 PM yellowhoard wrote:
> Mark to myth sounds too negative. I prefer mark to imagination.<br/>
Jay Boy Billy
On May 04 09:23 PM Donald Johnson wrote:
> I agree that the leaks probably are intended to test the market's
> reactions. But today's surge in bank stocks' prices seems irrational
> and may be giving a false positive. How much of the rally is due
> to short covering? What kind of black box trading is distorting the
> markets?
>
> And why the leaks against Wells? Is it being punished because its
> CEO has been politically incorrect about TARP and his desire to return
> TARP funds to the government?
>
> And Geithner has said that the stress test is designed to identify
> banks that couldn't lend under the worse scenarios. Is that an honest
> stress test?
>
> If a bank could survive the worse scenario by reducing lending, why
> should the government dilute shareholders. After all, under the worse
> scenario, who would want to lend, and what harm would be done if
> there were less lending?
>
>
On May 04 09:23 PM Donald Johnson wrote:
> I agree that the leaks probably are intended to test the market's
> reactions. But today's surge in bank stocks' prices seems irrational
> and may be giving a false positive. How much of the rally is due
> to short covering? What kind of black box trading is distorting the
> markets?
>
> And why the leaks against Wells? Is it being punished because its
> CEO has been politically incorrect about TARP and his desire to return
> TARP funds to the government?
>
> And Geithner has said that the stress test is designed to identify
> banks that couldn't lend under the worse scenarios. Is that an honest
> stress test?
>
> If a bank could survive the worse scenario by reducing lending, why
> should the government dilute shareholders. After all, under the worse
> scenario, who would want to lend, and what harm would be done if
> there were less lending?
>
>
Dont lose sight of the ball.
Nice job marketman.
On May 04 09:22 PM marketman54 wrote:
> OK FOLKS, LETS REVIEW THE FACTS OR LACK OF FOR THE FINANCIALS AND
> THINGS IN GENERAL:
>
> 1. Existing toxic assets on the books.
> 2. Existing credit default swaps on the books.
> 3. Total lack of clarity for the toxic assets due to approved governmental
> voo doo accounting for the banks.
> 4. Increasing unemployment that will:
> a. Increase the number of bad mortgage defaults.
> b. Increase the number of bad credit card defaults.
> c. Increase the number of bad auto loans and auto leases.
> 5. The tsunami of defaults coming down the financial district in
> bad commercial real estate loan defaults.
> 6. The tsunami of bad loans by GE Capitol that will bury GE.
> 7. The continued closings of small and medium businesses and their
> loan defaults on the banks.
> 8. Whatever happened to Fannie Mae and Freddie Mac - still in big
> trouble as unemployment increases.
> 9. OH, is AIG out of trouble yet?? I think not and either are all
> the major insurance companies.
> 10. Uncle Obama is printing money faster than I can count to 8 Trillion.
>
> 11. Our consumer nation is not consuming anything.
> 12. What happened to the auto industry? There goes another 200,000
> jobs and all the collateral that goes with it!!!!! Any real shock
> on the markets??
> 13. Our government is outright lying to us about our economy and
> will surely do so with the lack of STRESS TESTS. Do BAC and C need
> $10 Billion or $70 billion?? With all the cover up accounting and
> lack of information do you and I really know??? I figure they must
> be if they let the banks look good so we don't panic!!
> 14. House sales are up 3%, OH BOY! But these are not the sales
> of new homes. If you are a first time buyer, there is no way that
> these people have 20% down to buy a house. If you would like to
> move up, unfortunately you can't sell your house to do that. So
> what is the big deal with a 3% increase in home sales? Additionally,
> most of the big home builders used the Chinese drywall from 2005
> to the present. Imagine the 10's of thousands of class action law
> suites that will put these companies into bankruptucy over the drywall!!!!
> Imagine if people walk away from their houses and just let the banks
> have the Chinese drywally houses if there is no other recourse!!
> WOW WHAT A GREAT HOUSING MARKET!!!
> 15. LESS BAD IS GREAT. I want whatever the market morons are smoking
> to understand how things are so great now.
>
> No offense folks, if only a few of these things make any sense, we
> are in for some major trouble. The Fed. cannot print enough money
> to save us. All cannot be as rosy as they would like us to believe.
>
>
On May 04 07:14 PM SEM wrote:
> "I wonder if Geithner isn’t moving the same way, thinking that a
> clean bill of health will let markets do the recapitalizing of most
> banks, allowing Treasury to keep its remaining TARP money for the
> really sick banks."
>
> Do we really believe that a thumbs up from treasury is going to get
> money flowing into the big banks? Sure- the news will appear on the
> 6:00 news, but the average American, or even the average investor,
> doesn't control the purse strings that will help the banks in question
> to raise the institutional capital that's needed.
All that "cash" you cite is actually all credit. Money market is short term commercial paper. If the issuing companies start to die, the value pf their paper will drop. If they default, it will go to 0.
And it is far, far more than the Feds can believably backstop.
I am not saying this will happen tomorrow. I am just pointing out that this is an outcome the more sophisticated holders of all thia "cash" have to take into account.
Until then, all other end games are shell games:
positive PR for banks aka. "stress tests"
inflation tax on your kids aka. "quantitative easing"
accounting lies aka. "mark to market"
gambling debt settlements aka. "TARP"
casino mafia aka. "best and the brightests of Goldman Sachs"
politically connected corporations aka. "too big to fail"
They all say it's the best time ever to be bankers!
On May 04 07:01 PM mruyog wrote:
> One very important aspect of banks like Citi Bank is not brought
> up by many analysts and critics of the fed's attempt to correct the
> system is hundreds (perhaps a thosand or more) branch operations
> overseas such banks have and importance of those to the U.S. national
> interest. These branches provide a complex cobweb of interconnections
> of various aspects of our national interest. I do not think simple-minded
> analysts or critics or those with limited focus are capable of comprehending
> what Gethner (or Treasury) and Bernanke (or FDIC) have in their mind
> while developing the bank rescue plan. The issue of correcting the
> messed up system thus is extremely complex and those analysts and
> critics do not and can not have all the information Geithner and
> Bernanke has. I suggest that all wise readers of hundreds of half-hearted
> artcles and opinions expressed in the media keep this in mind.
On May 04 07:01 PM mruyog wrote:
> One very important aspect of banks like Citi Bank is not brought
> up by many analysts and critics of the fed's attempt to correct the
> system is hundreds (perhaps a thosand or more) branch operations
> overseas such banks have and importance of those to the U.S. national
> interest. These branches provide a complex cobweb of interconnections
> of various aspects of our national interest. I do not think simple-minded
> analysts or critics or those with limited focus are capable of comprehending
> what Gethner (or Treasury) and Bernanke (or FDIC) have in their mind
> while developing the bank rescue plan. The issue of correcting the
> messed up system thus is extremely complex and those analysts and
> critics do not and can not have all the information Geithner and
> Bernanke has. I suggest that all wise readers of hundreds of half-hearted
> artcles and opinions expressed in the media keep this in mind.
On May 05 11:16 AM felixd wrote:
> I bet the guy that leaked was Rahm Emmanuel...He has a history of
> that in the past and is skilled in how to best push an agenda with
> a skillful and timely leak. By leaking all this yesterday , (just
> in front of the testimony of Fed Chairman Ben Bernanke) the goal
> might well have been to put a little extra pressure on the fed chairman
> and make him feel a little extra heat from riled up (and largely
> uninformed) elected members on the Hill. My conspiracy theory holds
> that Ben might prove to be a thorn in the side of the Obama economic
> team sometime soon as he moves to limit Fed easing to curb future
> inflation. For Team Obama, a conciliatory Fed is crucial and it would
> be far better to put their own guy in there (read Larry Summers).
> To get that done, they need to question Ben's leadership and start
> eroding his credibiliyt. Hey just a theory!
"... without Obama's stooges tripping over each other to keep socialism alive."
Socialism? This looks more like fascism run by criminals.
Few ask questions such as:
What are the effects if Citi goes down?
What does that mean to the dollar(maybe moot)?
What are the international implications?
And if everyone's afraid of hyperinflation, how do you think the Chinese gov feels holding all those long term low yielding bills?
On May 04 07:01 PM mruyog wrote:
> One very important aspect of banks like Citi Bank is not brought
> up by many analysts and critics of the fed's attempt to correct the
> system is hundreds (perhaps a thosand or more) branch operations
> overseas such banks have and importance of those to the U.S. national
> interest. These branches provide a complex cobweb of interconnections
> of various aspects of our national interest. I do not think simple-minded
> analysts or critics or those with limited focus are capable of comprehending
> what Gethner (or Treasury) and Bernanke (or FDIC) have in their mind
> while developing the bank rescue plan. The issue of correcting the
> messed up system thus is extremely complex and those analysts and
> critics do not and can not have all the information Geithner and
> Bernanke has. I suggest that all wise readers of hundreds of half-hearted
> artcles and opinions expressed in the media keep this in mind.
I'm really, really tired of all this claptrap. It hard enough to make money in this environment without Obama's stooges tripping over each other to keep socialism alive.