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Roubini: Feds Can’t Subsidize Banks Forever

|Includes: Bank of America Corporation (BAC)

It’s clear to at least some that banks can’t subsidize the banks forever. So where does that leave bank share prices? It’s a valid question, even if it can’t be heard right now over the din of champagne corks popping and the chorus of Hallelujahs wafting up over Wall Street and the White House.

Writing in The Wall Street Journal yesterday, New York University economics professor Nouriel Roubini dared to claim that the leaks over feds’ bank stress tests were not credible.

The message being pumped out by the government is that the banks are in pretty good shape, give or take a couple of billion dollars needed to shore up the likes of Citigroup and Bank of America. But Roubini says there’s a ”disconnect” between the regulators’ assertions that banks are well capitalized and a recent study by the IMF that load losses would top $2.7 trillion – effectively signaling that the US financial system is near insolvent.

Now, faced with a choice of believing Tim Geithner and his fellow Treasury bureaucrats, who didn’t see the crisis coming, or Roubini, who did, we know which camp we’re in.

Roubini’s issue with the stress tests is that they just aren’t very stressful. They underestimate the jobless rate, for example. (The “worst case” scenario for jobless claims in 1Q chosen by regulators was 7.9%. The actual rate was 8.1%.) And Roubini says this will allow banks to remain in “bailout purgatory” rather than be forced to restructure via receiverships.