Stress Test for the Street

Funny are the ways of Street…but the Street is most honorable…and it cannot be wrong…never fight Mr. Market. If you do you would be mauled. But in 2007, those who went against the street benefited the most. The Street does lose its head, and there are those phases when not all the facts/news is factored-in. The art is to figure out when Mr. Market would look to redeem the honor. This becomes all the more difficult when the stakes of the mighty are involved, and for some period, they are able to manage the Street to their ways. With the bank stress test climax, the stress test for the Street has begun.

NYT reports:

A day after the bank stress tests were released, two major institutions, Wells Fargo (WFC) and Morgan Stanley (MS), handily raised billions of dollars in the capital markets on Friday to satisfy new federal demands for more capital. A third, Bank of America (BAC), hastily laid out plans to sell billions of dollars in new stock.

The speed and ease with which the banks swung into action, combined with a surge in financial shares, was hailed as a sign that confidence was returning to the financial industry. The sales seemed to put to rest questions about whether big banks would be able to lure private investors, rather than have to turn to the government again.

Before the results were made public, many of the larger banks successfully pushed the government to minimize the capital they needed to raise.

…With some off to such a rapid start — Goldman Sachs (GS) raised $5 billion before the stress test results were announced — the race is now on among the most robust to repay the government money they received last fall and so escape from government control.

Most probably they not want to lose the control over the government?

The script, which I mentioned in my previous post, is unfolding further. The models and inputs, it is understood, were provided by the industry, and it is understood that the inputs for the test were not independently checked for their veracity. 180 examiners examining 19 banks, many with very large and global operations, over eight weeks could have seen only what the banks wanted them to show. Anyone who has worked in bank operations would vouch for that. And the icing on the cake was that the banks could negotiate the capital it required! Further, the scenarios for which the banks' assets were stressed were, according to keen observers, a little too optimistic. Also, the fact that there were leaks also lend credence to this stage management. It would be good to find out as to who invested in the bank issues. The quirky feeling is that TARP money in getting circulated indirectly. Competitors holding hands for a cause!

The NYT report quotes Meredith Whitney:

But Meredith A. Whitney, a prominent banking analyst, said the results underscored the difficulties banks faced.

"The revenue environment is very different,” Ms. Whitney said. Given the recession, banks are not going to make much money from credit cards or originating mortgages, she said. And even if all the banks secured more capital, they still might not lend, holding back the economy.

The same report says:

Despite the sobering outlook, the mood on Wall Street was generally upbeat after the rosier-than-expected assessment of the biggest banks. The stock market climbed, with the Standard & Poor’s 500-stock index gaining 2.4 percent on Friday.

“If there were holes in this, the market would have seen it,” said Stuart Plesser, an analyst at Standard & Poor’s.

I wish the market had seen the coming of sub-prime in 2005-06 and the rating agencies it appears are never going to learn! Or probably they are also the part of script!!

To me all this is the blind (Treasury & Fed) leading the blind (banks) in the hope that miraculously both will suddenly find vision. The first part has been enacted to make the audience (Street) believe that both indeed have sight. How far these players are willing to take this make-believe is anybody’s guess. To me, the stress test for the Street has only begun.

For the sake of so many retail investors, I do hope that the miracle does happen.

Disclosure: No Positions.

Comments

[Jasper M:]

"If there were holes in this, the market would have seen it,” said Stuart Plesser, an analyst at Standard & Poor’s."

Yeah, S&P . . . the guys who did Such a good job rating CMOs.
I am amazed that they still have the hubris to make these sorts of statements. If I was McGraw-Hill, I would dump these guys for whatever I could get, just to improve my corporate image.

As another contributor reminded us not so long ago, the market is a weighing machine in the Long Run - in the short run, it is Voting machine, swayed by whatever notion is currently fashionable. In the words of Patrick Henry, "Trust it not, sir, it is a snare for your feet!"

May 10 11:53 AM