Bank Stress Test: The Cheat Sheet 14 comments
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All we’ve heard about this week has been the stress tests, so I figured I would summarize the important aspects for everyone. Here is what you need to know if you are following the large cap U.S. financial sector.
Capital Ratio Requirements: Banks must have enough capital to maintain the following ratios:
*Tier 1 Capital of 6.0%
*Tangible Common Equity (TCE) of 4.0%
Deadlines: For banks that need more capital, here is their timeline:
*Articulate plan for raising capital by June 8th, 2009
*Implement plan by November 9th 2009
*Maintain target capital ratios through December 2010
Sources of Additional Capital:
The regulators have indicated that raising private capital is the preferred source of raising capital. The banks may also choose to sell certain assets and use cash earnings to reach the targets. If those options are not sufficient to reach the desired capital levels, the banks may convert their TARP preferred capital into mandatory convertible preferred stock, which can be converted, on as needed basis, into common equity in order to boost capital levels to the needed levels.
Here are the results:
As for individual stocks, I have long been writing positively about COF, PNC, and USB on this blog. COF and USB passed and PNC needs to raise the least of all the banks, a meager $600 million. These results are not surprising to me, and I continue to like all three stocks long term.
Disclosure: Peridot Capital was long shares of COF, PNC, and USB at the time of writing, but positions may change at any time
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I figure with these already on the books and 4 million new mortgage defaults coming down the road, it will only take another $4 to $5 trillion to bail them all out!!!
Add in some credit card defaults, auto loan defaults and lets not forget the tsunami of commercial real estate defaults, it will only cost Obama and boys another $10 trillion.
Hey, does the Treasury have enough paper to print this up? I offered to put a printing press in my garage to help them out.
I expect you won't believe me, but Citi may triple in the coming weeks. With the stress-tests over, longs will feel their down-side is floored, and shorts are at great risk. The current short interest in Citi is enormous, the #1 on NYSE by far, and more than 20% of Citi's issued shares (see link below):
nyse.com/financial...
This could be another Volkswagen type event when that company's stock shot up 4 times in 48 hours. Before the squeeze, like Citi in the US, Volkswagen was the most shorted stock on the German market.
VLKAY)+Triggers+Government+Regulator+Inquiry/4101351.html'>www.streetinsider.com/...
The negative case for Citi is well known, but last quarter the bank more or less broke even. With a market cap of only US$20bn, and average pre-crisis earning of US$16bn in the 8 years prior the stock is dirt cheap if it survives, trading at maybe 2x post crisis P/E. PPOP was US$12bn vs charges of US$10bn last quarter, on a loan book of around US$650bn, the charge off rate looks to have stabilised or peaked. Beyond the US, especially in Asia and South America, Citi still has a respected brand and is doing fine.
There is a bubble of hysteria against Citi and the crowd will be wrong, as always. Citi is the most dangerous short I have seen in a long time.
No progress can be made until they recognize and tackle modern day accounting and financial instruments. Closing your eyes and playing dumb is a recipe for disaster. You would have thought they would have noticed this after the 2008 mortgage CDS/CDO driven meltdown. I guess it wasn't a big enough event for them to care about.
garbage in = garbage out
Safe money should be in a combination of cash, CD's and precious metals: platinum and gold. Only trading money in stocks.....or Las Vegas! Good luck
Good luck Citi shorts, you have been warned.
The other shoe is about to drop methinks.....
Problem is, the government don't want them to pay back the loans.
Why? Because the government will be left holding the bag. The government must have borrowed the $700B TARP from the likes of China and will be paying annual interest rates on those loans.
Stress testing the banks might force them to borrow more from the TARP and thus the government can have their 5% annual interest from most if not all of the $700B TARP allotment. But the government will have to give assurances they will not use command and control over the banks.
The more the government gets it teeth sunk into the banking industry, the more chances the banks will not fail in the furture since the government can always legislate new "projects" or initiative to help out the banks in particular and the economy in general. Meaning, the government has the power to make the banks profitable in the future and will not hesitate to use that power in order to protect it's own $700B investment. Since the taxpayers money is on the hook, the public will be more hesitant to oppose of new legislations that will benefit the banks in particular and the economy in general even if such legislation can potentially adversely affect the US consumers.
Since most of the $700B TARP has been deployed into the mega-banks who has more exposure all over the world, it would be beneficial for the banks if the government will pass legislation toward further easing of trades specially to that of the developing countries.
The developing countries will still need lots of capital for their basic infrastructure projects such as electrification, water supply systems, roads, etc. - specially the smaller ones in order for them to sustain their industrialization efforts of the last 2 decades.
They are going to need the assistance of the mega-banks such as Citigroup, BAC, JPM, and WFC who are among the most liquid banks in the world and are therefore in the best possible position to provide financing to the developing countries once this global economic downturn has turned around.
China is the first one to make a credible turn-around since Oct 2008. Most other developing countries has been making substantial gains since Oct 2008 while the US and Europe had been going downstream until March 2009.
There is a big world out there. The United States local market may have shrunked but the consumer markets in China, India, Brazil, Russia, Indonesia, Thailand, etc. are still a vast untapped markets the US can cultivate in the decades ahead.
The US and it's mega-banks have vast $trillions of liquidity, albeit borrowed from the likes of China, at very low interest rates.
Those trillions of dollars cannot be deployed in the United States since the US is already a well developed country and it's own consumers have already learned the lessons of how bad things can go if they spend beyond their means - meaning, no need for multi-billion infra-structure projects and less consumerism in the US and thus much less new companies (who will need financing from the banks) setting up in the US.
Thus, the mega-banks $trillions of cash reserves cannot be deployed in the US but rather most of them should be used as assistance loans to the developing countries.
This will be a good alternative on how the US can generated "export" income while the US is not in a viable position to gain substantial market shares in the developing countries through the "traditional" export earning industries such as agriculture, mining, manufacturing, and technology.
The US is in the most viable position in garnering a substantial portion of the profit from the global marketplace by Financing the industrialization projects of the developing countries rather than try to fight teeth to toe in the highly competitive consumer markets of China, India, Brazil, Russia, Indonesia, etc. where the profit margins on consumer products are absurbly tiny as compared to that being enjoyed by US companies from the US consumers.
For example, a retailer in the US can easily make 30% gross profit margin while in Asia a 10% gross profit margin is already acceptable if not desirable. They achieve more profit through fast turn-overs and economies of scale rather than through percentages. Add the cheap labor to the equation and the United States' manufacturing companies have very little chance to compete effectively in the consumer products markets to those produced by the developing countries.
Thus, the US has to deploy those $trillions of "borrowed" money into financing industrialization projects in the developing countries.
Borrow at low interest rates from cash rich countries such as China and lend the money to cash-strapped but viable developing countries at much higher interest rates - that way the US can use it's global leadership and credibility for maximum profit in the field where it commands the most - the banking and finance/insurance sectors.
There are only 2 sectors by which the US has commanding lead in the global marketplace:
- Military hardware/software, and
- Banking and Finance/Insurance
Thus the government cannot afford to lose the banking/finance sector to the "western world's" CDO/CDS crisis.
Develop new means and ways later on in order to become competitive again in manufacturing and/or technology as we try to solve this unemployment problem primarily caused by the stock markets meltdown and the crunchdown in consumer spending.
Posted May 08, 2009 04:05pm EDT by Aaron Task in Newsmakers, Recession, Banking
Related: WFC, MS, BAC, C, XLF, ^DJI, ^GSPC
Bank stocks soared Friday, including Wells Fargo and Morgan Stanley, which sold shares a discounts of more than 10% below Thursday's close.
The ability of banks to raise capital is certainly positive but the idea of shares rallying amid the capital raising and dilution is "counterintuitive," Bank of America CEO Ken Lewis said on CNBC this morning.
BofA shares were also rallying even as the government said it needs to raise an industry-leading $33.9 billion. Citigroup stock was also a big winner after the government's curious declaration that it "only" needs to raise $5 billion.
While much of the focus is on the stress tests and banks' efforts to raise cash, the real story is Geithner's Public-Private Investment Program (PPIP), says William Black, an Associate Professor of Economics and Law at the University of Missouri - Kansas City.
The PPIP is the "greatest boondoggle in the history of the world," says Black, a former bank regulator who was counsel to the Federal Home Loan Bank Board during the S&L crisis. As occurred during the S&L era, Black says the PPIP will allow banks to exchange "trash for cash" and turn "real losses into faulty gains."
If the goal of Tim Geithner and other regulators was "to rip off the American taxpayer for the benefit of the least-deserving wealthiest people you can imagine, well - mission accomplished," Black says.
online.wsj.com/article...
Making the whole affair, a typical power play, by the banks. Way to regulate Geithner. We have nothing but confidence in the banking system now. What's on tap for next week? Will every government official be on TV claiming the banks are great, until they have time enough to secure second offerings? Tell me one large investor that will be fooled, outside of the government?