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Stress Tests Under Stress

|Includes:Citigroup Inc. (C), GMA
ABC New’s article “Economic Forecasts in Banks miss their mark” takes a brief looks at the current situation of the banks that underwent the stress tests.
 “The test results in May found that 10 of the 19 largest banks needed more capital to withstand losses they would suffer if the recession worsened. “
“We're already at record numbers on losses, and those numbers are rising," said Christopher Whalen, managing director of Institutional Risk Analytics.
“Whalen said that despite government subsidies, banks like GMAC and Citigroup Inc. still are too troubled to extend credit and support an economic recovery.
"These are zombies and they can't make loans," he said. "None of this is helping the real economy."
Whalen said the only way to improve the companies would be to push them into bankruptcy and get rid of the bad assets that are weighing them down.”
Out of the financial institutions tested, GMAC was not able to raise the capital required by the test. It is now in talks with the government about receiving additional Funding. And, despite passing, Citigroup recently went into Bankruptcy. But, we knew this would be the case.
looked at Bankruptcy as a viable option; “it would allow healthy banks to offer services to the clients of troubled firms and provide the opportunity to purchase pieces of distressed businesses at bargain prices. Healthy institutions that don’t want to acquire a mess could incur less risk and more customers. “
The article went on to encourage the overall testing of the financial system in order to develop the best course of actions and reform.
It is clear that the Stress Tests were done to boost confidence, but at what costs? The real economy continues to experience rising unemployment and the tight credit markets are punishing home sales and the growth of small businesses.
It seems the resources spent on the Stress Tests should have been used on Financial regulatory reform that empowers the consumer and investor with transparency and education.
 Disclosure: No positions
Stocks: C, GMA