Stress Test Update
| Thu Apr. 23, 2009 9:06 PM PDT
The Treasury plans to release the broad results of its stress tests on Friday. The New York Times reports:
Analysts are already betting that the stress tests will show that banks need to raise significant amounts of new capital, as profits made in the first three months of the year give way to more losses, tied to credit card, commercial real estate and corporate loans. An assessment by [Keefe, Bruyette & Woods], which calculated its own stress test for the industry, concluded Thursday that United States banks might need as much as an additional $1 trillion in capital.
As part of their exam, regulators have been poring over bank balance sheets to spot financial problems that may not surface for months. Officials are assessing the financial condition of the banks based on their potential losses and earnings over the next two years. That is why some banks that recently announced blockbuster earnings may still need to raise sizable amounts of fresh money.
As the dust settles from the shakeout on Wall Street, the 19 banks subject to stress tests are starting to divide into three groups: the strong that can weather the storm; the weak that will need new, perhaps significant, support; and the ones on the verge, whose fate will be decided by regulators.
I'm still shaking my head trying to figure out how this is going to work out. If KBW is right — and their estimate certainly seems to be in the right ballpark — and a substantial fraction of that capital turns out to be needed by half a dozen of the biggest banks, where is it going to come from? The Times report is very antiseptic, but it's a fantasy to think that any bank "on the verge" will be able to raise private capital, and the Treasury's TARP money is nearly exhausted. So then what?
The next couple of weeks are going to be very interesting. If this report is even roughly accurate, I really have no idea how Tim Geithner is going to tap dance his way around the N-word much longer.
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Comments
"N-word"? Bankrupcy.
Submitted by Anonymous (not verified) on Thu Apr. 23, 2009 9:28 PM PDT.
"N-word"? Bankrupcy. Failed. Insolvent. Receivership. Liquidated. Dissolved.
Stop pandering to the stupid. "Nationalization" isn't even accurate.
The capital source
Submitted by daCascadian (not verified) on Thu Apr. 23, 2009 10:04 PM PDT.
will be China and the oil rich kingdoms (or some reasonable proxies for them). We will hear "We have to do this !" from some mouth piece in suitable power clothing.
"Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin to slit throats." - H. L. Mencken
And letting them fail is bad because?
Submitted by Steve (not verified) on Fri Apr. 24, 2009 4:46 AM PDT.
Seriously, these mega banks should have never been bailed out, throwing good money after bad, let them topple, yes, there will be pain but getting them out of the way is the only means to getting to a new, improved economy.
Here's my idea. Instead of nationalizing private banks make a national bank. Take the $1T and make a Bank of the United States and offer very lucrative lending rates. Give it a 5 year life span, in the first two let it compete directly with private banks with the aim of weeding out the bad/zombie/broken ones. If you own a business and want to expand or cover payroll or whatever and your bank is not lending or their rates suck, then come to BUSS. Of course, there will be strict requirements for getting capital, this won't be for businesses with bad credit or poor management.
BUSS can also have a consumer half which would buy up mortgages from other lenders and restructure them, keeping people in their homes, shoring up property values, reducing foreclosures, etc.
After X years, when the markets have cleared out the bad banks BUSS can then begin to drive itself out of business by offering sweetheart loans to existing banks and transferring the now restructured and profitable mortgages back to private companies as well as the commercial accounts.
Don't nationalize private banks but compete with them. Seriously, now much worse could the feds do than Citi or BoA management has in the last two years?
Speaking of stress and the need to raise money....
Submitted by hollywood (not verified) on Fri Apr. 24, 2009 4:56 AM PDT.
OK, it's off topic, but what do you think about the ballot proposals to revise/amend the California Constitution? I know you tend to be a NO guy on things like this, but is this different this time?
Not sure the BUSS works
Submitted by dr2chase (not verified) on Fri Apr. 24, 2009 5:44 AM PDT.
It sounds like it would skim all the good customers away from the banks, leaving them with the bad customers. We'd be better off if the big banks could be carved up into smaller banks (more competition) and regulated enough to keep them from doing dangerous stuff.
If these big banks were a startup company, the story would be simple. Either close up shop, or else the current investors get badly diluted when lots of new stock is sold at whatever price is low enough to get the required cash from new investors.
Justice requires blood
Submitted by Trippp on Fri Apr. 24, 2009 7:31 AM PDT.
The banks have rightly lost the faith of the people. In addition to tangible assets, the banking individuals actually sold our faith off, a bit at a time, for their own personal profit.
To have any hope of a real healing instead of just another poultice put over the festering sore, we must have true justice. The culpable individuals must face criminal prosecution.
If these individuals were average criminals or drug users they would already be charged, tried, sentenced, and in prison under mandatory sentences.
But since the rules of law do not apply to the privileged elites there will be no justice, merely more of the same.
The treasury still thinks there is a way to avoid justice and still fix this. The criminals are still thinking there is a way to get away with this, and so far it looks like they are right.
So they've sold our faith in the banks. Are they now selling our faith in the justice system so the same criminals can profit once again?
The question is simple - will the guilty pay or get away? What's it gonna be Obama? That is the question - what's it gonna be?
Tripp
If mark-to-market accounting revises the value of certain assets, has the bank's reserve value decreased commensurately? Even if they can't loan as much as before, the banks which were sound should still be sound. What has been driving them over the edge? It surely isn't JUST the toxic assets!
I'm no expert but
Submitted by Trippp on Sat Apr. 25, 2009 9:04 AM PDT.
I think maybe they are discovering that what they called their reserves are actually toxic, and what was once mistakenly counted as a plus is now correctly counted as a minus.
D'oh.
And since that experience is global - who they gonna sell their possible crap to?
For example, one of my hobbies is collecting hand-made marbles. I like them, and in general want to support the artists that make them. I also had a crazy dream that someday I'd like to learn how to make them myself.
Imagine if I was counting on my marble collection, valued at, say, $1,000, for my retirement? Well now I can't seem to sell the marbles for nearly anything so I am screwed. What is the value of something no one wants to buy?
Instead, being a smart and conservative and responsible citizen, I did the responsible thing and put most of my retirement money in tax-deferred indexed mutual funds, because the diversity would protect me from bubbles, and our government shaped tax policy to strongly encourage that action.
D'oh!
Tripp
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