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Will Government Convert its Preferred Shares in Banks?

For those of you who has not yet seen this, take a look at the following rumor:

“SmarTrend(NYSE:R) News Watch: Troubling 'Stress Test' Results Leaked

11 minutes ago - Comtex Smartrend(r)

Related Companies

Symbol

Last

%Chg

BAC

8.95

-15.55%

C

3.11

-14.79%

GS

117.79

-2.33%

HBC

33.47

-7.59%

JPM

31.85

-4.24%

As of 11:50 AM ET 4/20/09

Turner Radio Network, which claims to have obtained results of the government's bank "stress test" through a government leak, said that the results were extremely troubling and government officials have been debating even releasing them to the public. According to the report, of the top 19 banks in the nation, 16 were technically already insolvent. Of those 16 that were insolvent, not one can withstand any obstacles in cash flow. Furthermore, if any two of these 16 insolvent banks go under, they will completely wipe out the remaining FDIC insurance funding. The report went on to say that of these 19 banks, the top 5 largest banks are undercapitalized so dangerously, that should they go under, there is extreme doubt as to whether they could continue business. Five of the largest banks including JP Morgan (NYSE:JPM), Goldman Sachs (NYSE:GS), HSBC (NYSE:HBC), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) have such large credit exposure from the derivatives trading desks that it exceeds their capital. The leaked report held that the credit crisis is much bigger than the government has let on, as the FDIC's problem list maintains that it has only 252 institutions with $159 billion in assets. To the contrary, the report said that 1,816 banks and thrifts are at risk of failing, with $4.67 trillion in total assets, up from the previous quarter's 1,568 banks, with $2.32 trillion in assets.

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When I coupled this with the talk that the government may convert its preferred to common, I decided to sell my speculative position in Citi.