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Apr-18-2009Bank Regulators Clash Over US Stress-Tests Endgame(topic overview)
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The task of coming up with money underscores the difficulties posed by the next phase of the Government's immense effort to stabilise financial markets. Some senior officials say they worry that allowing strong banks to return their bail-out funds would stigmatise the companies that couldn't, scaring off their investors. Treasury officials overseeing the rescue effort were willing to take that chance, believing the risk of such bank runs had receded as the financial system became more stable, a senior Administration official said. The official noted that while Wall Street executives had been expressing worries about what the Government would reveal about their internal conditions in the stress test, the markets had reacted positively as the date of the stress test results approached. For instance, the shares of banks, both weak and strong, had been rising. The official said that some banks would be able to convert the federal aid they received last year into common stock, providing the companies with the most important kind of capital they needed. For that reason, they might not require new Government investments. [1] Goldman Sachs reported larger than expected Q1 earnings (ex December loss due to earnings calendar move) while at the same time raising fresh capital through a $5 billion stock sale in order to pay back the $10 billion in TARP money received last year. A look below the surface reveals some caveats to this positive picture. As Nouriel Roubini points out in a recent writing: '''In brief, banks are benefitting from close to zero borrowing costs and fewer competitors; they are benefitting from a massive transfer of wealth from savers to borrowers given a dozen different government bailout and subsidy programs for the financial system; they are not properly provisioning/reserving for massive future loan losses; they are not properly marking down current losses from loans in delinquency; they are using the recent mark-to-market accounting changes by FASB to inflate the value of many assets; they are using a number of accounting tricks to minimize reported losses and maximize reported earnings; the Treasury is using a stress scenario for the stress tests that is not a true stress scenario as actual data are already running worse than the worst case scenario.''' Other commentators also point to the fact that many of these banks were among the main recipients of AIG bailout funds in previous months, e.g. Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion), according to New York Times data. The firms involved dismiss this factor as immaterial for Q1 earnings.[2] Some banks will be graded more highly than others and the public disclosure of their relative performances will help investors to determine which shares they wish to sell and which they want to hold. The Treasury's decision to publish the results of its stress test is thought to have been influenced, in part, by Goldman Sachs. Goldman Sachs sold new shares worth $5 billion (£3.3 billion) on Tuesday and said that it would use the money to help to repay its $10 billion capital injection from the Government last October.[3] The stress tests could show that the needs of the 19 banks were substantial, requiring Administration officials to rely on bail-out money being returned or even scale back other federal programs, Government sources said, on condition of anonymity because the stress tests are still in early phases. In the past few months, Administration officials have outlined ambitious plans that leave them with $US32 billion unallocated from the $US700 billion rescue package - far less than officials expect to need for a new round of bank aid. Treasury officials say they may have as much as $US110 billion left over because some of the initiatives are not drawing as much participation as expected. Many companies are wary of taking federal aid, which requires them to cede some control to the Government and limit executive pay. Treasury officials say they conservatively project that at least $US25 billion will be returned by aid recipients after the stress test results are unveiled. Several big companies have said they will repay their money. Among them are Goldman Sachs, which received $US10 billion, and JPMorgan Chase, which got $US25 billion. Some analysts and officials worry that as strong banks return their government aid, other banks will feel pressured to overextend themselves to follow suit.[1]
When it comes to bank earnings, so far so good. Now it's about the Treasury stress tests of the 19 banks. That ain't so good. The markets got a look at profit figures and expectations from a number of big banks and companies this past week. Wells Fargo says it expects a first quarter profit, JPMorgan Chase as usual didn't disappoint with decent earnings, and the beleaguered Citigroup's losses came in better than expected (chief executive Vikram Pandit is not getting the kudos he deserves for rightsizing Citi's ocean liner of debt and bad bonds). 'trades like a financial' General Electric's earnings for the first quarter were largely in line with analysts' expectations-even though a peek inside the biggest driver of the industrial conglomerate's profits, the black box that is GE Capital, shows a massive can of snakes, and also reveals that all of this finance unit's $1.1 bn in profit for the quarter came from a tax benefit of $1.2 bn (GE is not being stress tested). The stress tests of the 19 banks could result in the government yet again parkiing its ambulance in front of yet another bank with bags of more taxpayer moneyor it may orchestrate another shotgun wedding, because it has said no bank will be allowed to go bankrupt.[4] Talk about a "stress test," said Kathleen Pender in the San Francisco Chronicle. With the Obama administration's announcement that it will release some results of its financial stress tests on the largest 19 U.S. banks, Treasury Secretary Tim Geithner finds himself in a "no-win situation." He can hardly backtrack now, but if he reveals meaningful information, depositors and investors will surely flee the unhealthiest banks. What if they do? said Paul LaMonica in CNNmoney.com. "It's not the job of the Treasury or FDIC to prevent investors from selling off shares of banks that have poor fundamentals." The Treasury has to accept that there are good banks--maybe Goldman Sachs and Wells Fargo--and bad banks, and it's better if we all know which are which.[5] The Obama Administration is planning to disclose details about the financial health of America's 19 biggest banks in an attempt to restore investor confidence in the country's banking system. The U.S. Treasury has carried out so-called stress tests on America's major banks to determine how they would cope in the event of further financial shocks. It had originally planned to allow the banks to decide whether to disclose the results of the tests and how much information to reveal. The Administration is now understood to have changed its mind after concluding that keeping its findings secret would fuel rumours that could prompt an exodus of shareholders from those institutions rumoured to be weakest.[3]
The Treasury Department will publish final grades on the stress tests for 19 of the largest U.S. banks on May 4. With the markets getting much fuller insight into who's weak and who's strong in only two weeks, the government is likely to hear plenty of criticism that it's picking "winners and losers" from among the institutions by releasing the results. When the results are revealed, banks desperate to avoid being labeled a "loser" if the stress tests show they might not fare as well as competitors will likely produce plenty of spin. In the meantime, such a scenario may already be playing out as banks announce first quarter earnings ahead of the stress test results. While the Obama administration has asked banks not to announce stress test results early, stronger banks are signaling with a sly nod and a wink how they fared fared beforehand with formal announcements of plans to repay Treasury's Troubled Asset Relief Program investments.[6] The Obama administration is considering making public some results of the stress tests being conducted on the country's 19 largest banks, said people familiar with the matter, a move that could help more clearly separate healthy banks from the weaklings. Until now, the government has tried to treat all banks equally, pouring cash into both strong and struggling institutions to prop up the financial sector. The strategy has provided cover for beleaguered banks, which received funds along with their stronger brethren. This possible move, combined with first-quarter bank earnings and the push by some financial institutions to raise new capital and repay their bailout funds, could lay the groundwork for a new phase in the financial crisis.[7] JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, MetLife, PNC Financial, U.S. Bancorp, Bank of New York Mellon, GMAC, SunTrust, State Street, Capital One Financial, BB&T;, Regions Financial, American Express, Fifth Third Bancorp, and KeyCorp. SunTrust, BB&T;, Regions Financial, Fifth Third, KeyCorp, PNC Financial, U.S. Bancorp, GMAC, all are being talked about as possible merger candidatesnot that they will fail the stress test, because the government now says none of the banks will fail (given the way the automotive sector is headed, GMAC may be restructured through a bankruptcy as would one of its parents, GMCerberus, the vulture fund which owns Chrysler, owns 51% of GMAC). About 200 bank examiners have taken to the banks on the list and are poring through their books right now. The''government is measuring their capital strength based on a number of different''bad economic scenarios.[4] What measure is the government using to ascertain that a bank is well capitalized? There's Tier 1 capital ratios, that can include all sorts of junk in it like goodwill, which is basically the overpayment a company can make when it buys another company. Loaded in there are deferred tax assets, a sum which basically is a basket of losses that have built up, which a company can use to reduce the income taxes they owe to the IRS in future yearsand in turn boost profits. They have to report a profit to use that deferred tax asset, something that hasn't really been happening lately. By that measure "we'd all be insolvent," the chief financial officer of a major U.S. bank tells me (now you know why the average tenure of a CFO is three years.) Wells Fargo may need $50 bn in new capital due to writedowns, says Keefe Bruyette & Woods, which did its own stress test of the bank's balance sheet.[4]
The sources said it is unclear exactly when the "concept paper" will be released, but it is anticipated it will be before the U.S. Treasury Department announces aggregate results at the end of April or the beginning of May. "It will be a framework to understand the results," one of the sources said. U.S. regulators are conducting stress tests at the 19 largest U.S. banks such as Citigroup ( C.N ), JPMorgan Chase & Co ( JPM.N ) and Wells Fargo ( WFC.N ), to determine their capital needs if economic conditions were to deteriorate further. The banks have completed their internal versions of the tests, but they have not yet seen the examiners' version of how they fared, the sources said.[8] U.S. regulators are conducting stress tests at the 19 largest U.S. banks, including Citigroup (C.N: Quote, Profile, Research ), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research ) and Wells Fargo (WFC.N: Quote, Profile, Research ), to determine the health of the banking system. "Early in May, you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests," White House spokesman Robert Gibbs said. The tests will assess how much of a "capital cushion" the banks are likely to need to stay healthy, given the current economic environment, he said.[9]
The idea behind the stress test was to identify which major banks would need to raise more capital to withstanda worse-than-expected surge in loan losses because of the recession. Banks that come up short, in their regulators''' eyes, would either have to raise more capital from private investors or take more government money (with all the attendant strings attached). It still isn'''t clear how much detail the government will release on the tests or how much they'''ll allow individual banks to say. As with so much of the financial-system rescue, regulators seem to be making this stuff up as they go along.[10] The stress tests have become a punchline. They were designed to allow every bank tested to pass. Federal regulators have instructed the 19 banks undergoing the tests to keep the results a secret, because their goal is to conceal from the public which banks are weak and which are strong; even though the tests are a sham, the feds don't want some banks telegraphing their relative strength by releasing the results of their stress tests early. What if some banks really are beyond rescue? In his speech, Obama rejected both "nationalization" and the free-market approach, though either would be preferable to the status quo of keeping zombie banks on life support indefinitely. The nationalizers want the government to oversee the orderly liquidation of insolvent banks; the free-marketeers think broken financial institutions should work out their problems in bankruptcy court. Either approach would carry risks, but both have the upside of transferring the majority of the losses to bondholders, not taxpayers. As it stands, we're stuck with the worst-case scenario: Taxpayers have implicitly guaranteed these institutions, yet they remain in private hands. Instead of resolving the zombie banks, we are propping them up. This is exactly the recipe that gave Japan its "lost decade."[11] At a meeting between Obama and the nation's top bankers on March 27, the President encouraged the CEOs to participate in programs designed to purge the toxic assets. This tension over pricing helps explain the leaked stories on Wednesday announcing that Treasury Secretary Timothy Geithner will make public the results of the banks' "stress tests" next month. The tests started out in March as a gauge of banks' ability to handle a worst-case economic downturn; now they've become a weapon for Obama and Geithner to force the banks to clean up their acts, officials say. "It gives Obama and Geithner leverage to make large institutions do things they otherwise wouldn't do," says a senior government official involved in the tests. The banks' resistance may be the biggest hurdle Geithner faces in his plans to rebuild the financial sector.[12] "With the results of the stress tests in hand, it just gives you more leverage," says the senior government official involved in the tests. Obama and Geithner may not be completely out of the woods even if they do force banks to sell their toxic assets. Some banks may be so deeply in debt that even the proceeds from the sales won't be enough to fill their capital needs. In that case, the stress tests may prove useful in another way.[12]
The NYT speculates that the announcement by Goldman Sachs that it wants to repay the $10 billion it got from the government's Troubled Asset Relief Program may have pushed the government to release some of the results from the stress test. Goldman is creating lots of (additional) headaches, not only for the government but also for other banks that are now under increased pressure to follow its lead.[13] The market's ability to weed out the weak and the strong banks was greatly heightened on Monday when Goldman, Sachs & Co.' s (NYSE:GS) reported a big first-quarter profit and a $5 billion offering to pay back the money it received from the Troubled Asset Relief Program. The repayment is also likely putting pressure on the administration and other banks to provide more transparency into their long-term condition. Banks have been fairly vocal about their expectations for their first-quarter results, with many proclaiming a return to profitability. Those same banks could end up getting stung should results from the stress tests show underlying weakness that makes continued profitability doubtful.[14]
Fed chief Ben Bernanke, in a testimony before the Financial Services Committee, said if any bank needed capital after the stress test, it will have six months to raise money from the private sector. Otherwise, it can request funds from the $700 billion Troubled Asset Relief Program.[15] The list of companies undergoing "consistent, realistic, and forward looking" assessments, as Treasury Secretary Timothy Geithner said in February, has not been made public. It was not clear whether holding companies like MetLife ( MET Quote ), whose primary business is life insurance, would be included in the mix. Therefore, TheStreet.com published a stress test preview in March looking all 31 U.S. holding companies that filed consolidated financial statements with the Federal Reserve and had total assets of over $50 billion. ProPublica.org later compiled a list of 19 holding companies that the organization determined to meet the Treasury's criteria for the stress tests. The following table includes earnings, capital adequacy and asset quality data for these 19 companies provided by SNL Financial.[16] The Federal Reserve, the Treasury and other regulators are conducting the stress tests in an attempt to determine the safety and soundness of the nation's 19 largest financial institutions and to bolster the market's confidence in the banking industry. Sources told The Post that banks examined as part of the stress test are expected to be assigned one of three rankings: top tier institutions that are capable of operating even in the most dour conditions, those that aren't and those that fit somewhere in the middle. Christopher Whalen, co-founder of risk-advisory firm Institutional Risk Analytics, believes that Citi may fall dead last among the 19 banks given its outsize consumer debt exposure. Whalen argues that Citi should be forced to restructure with bondholders converting their positions into equity to prevent matters from getting worse. He fears that Citi will "chew through" its rescue funds because its loss rates and expenses are comparatively higher than its peers.[17]
We will have wasted a lot of time - the good bank solution and the slaughter of the unsecured creditors should have been pursued actively as soon as it became clear that most of the U.S. border-crossing banking system was insolvent, but for past, present and anticipated future tax payer support.'' If the Treasury can be pushed into a pro-active policy by declaring, just before the beginning of the weekend, that most of the banks undergoing the Stress Test have failed them and moving these wonky institutions straight into the FDIC's special resolution regime where they can be restructured according to the good bank model, we could have well-capitalised banks capable of new lending and borrowing by the beginning of next week. The same policy should be pursued wherever banks have failed: it never makes sense to put the interests of the unsecured creditors before those of the tax payers.'' It is bad economics in the short run and in the long run.'' It is political poison.'' I fear, however, that only in those countries where there is no fiscal spare capacity (as in the U.S., for political reasons or in Iceland, for economic reasons), the right solution to bank restructuring will be adopted.''[18] Essentially the government has painted itself into a corner, writes Ryan Avent, the new blogger over at Portfolio.com's Market Movers. It is precisely this quandary that has Joe Weisenthal asking if there is any good reason to follow through with the stress tests and actually release the results? (Weisenthal also makes this other point in the post: "It doesn't help that all the banks apparently had blowout quarters, which if they're being totally honest should make you wonder why they need any extra capital at all.") It's a risky strategy, but I don't think Treasury has much choice at this point."[19] If the administration provides meaningful information of any kind, on the other hand, markets will naturally assume that the weakest looking banks are the weakest banks, and will begin trading accordingly. The way out of this problem I think is for the government to recapitalize the weakest banks before it releases the stress-test results, and then to release post-money stress tests showing that, as a result of its recapitalizations, all the tested banks are basically fine. It'''s a risky strategy, but I don'''t think Treasury has much choice at this point. For what it's worth, I'm still not convinced aggregate data is a worse idea than bank-level data, at least under the circumstances.[20] Goldman said that the repayment would be contingent on the group passing the stress test and the market interpreted that as a sign that the bank was very confident of passing. The Treasury feared that Goldman's action might put pressure on rival banks that may be in worse shape than Goldman to begin repaying the Government to demonstrate to their investors that they, too, are financially solid. It concluded that it would be better to have the true financial health of the banks out in the open and therefore to publish the results of the stress tests. It is not known exactly which data the Government will issue about tests.[3]
Then the trial balloon was floated of releasing aggregate results, and that did not go over well either. Now the New York Times reports that the Treasury has decided to reveal "some" stress details, its hand being forced by. Goldman Sachs. The irony is rich, but if the markets take badly to some of the information revealed, this could produce a result exactly the reverse of what the Administration intended to achieve with this effort'Remember, a bank that fails the test is given a certain amount of time to raise equity, and if that fails, they have to take more TARP funding.[21] The administration apparently believes that not disclosing at least some information from the stress tests would create too much uncertainty and lead to rumors and bank runs. Well-capitalized banks like Goldman Sachs (NYSE: GS ) and Wells Fargo (NYSE: WFC ) have been signaling their confidence, putting pressure on other banks to make similar moves -- optimistic earnings forecasts and plans to repay TARP funds -- even if they're really not in a position to. A lot of people will criticize the plan to disclose information about the stress tests, but I think it's a good move: Providing more information to investors is the right thing to do, and it makes sense for investors to pump their funds into well-capitalized banks instead of poorly-financed ones.[22] "The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest. Officials have deliberately left murky just how much they intend to reveal -- or to encourage the banks to reveal -- about how well they would weather difficult economic conditions over the next two years."[14] Accoridng to The New York Times, "The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest." That is an odd position to take.[23]
The New York Times leads with word that the White House has decided to reveal at least some results from the so-called stress tests that are currently being completed on the nation's 19 biggest banks. The Wall Street Journal leads its world-wide newsbox with North Korea kicking out U.N. nuclear inspectors and announcing it would never again participate in disarmament talks. Responding to the U.N. Security Council's criticism of its missile launch, which it described as an "unbearable insult," North Korea also said it would restart its nuclear program. USA Today leads with a look at how a program to secure the nation's ports is delayed for at least two more years because the Department of Homeland Security still lacks fingerprint readers that can be used with the high-tech ID cards those who work in secure port areas were forced to purchase.[13] WASHINGTON (AFP) — The U.S. government will reveal some details about the health of 19 top U.S. banks following the completion of a set of "stress tests" on the ailing industry, the White House said Wednesday. Details will be revealed in line with the administration's promise to introduce transparency into its effort to rescue the crippled sector, despite concerns that openness could cause a run on most badly indebted institutions. "You will see in a systematic and coordinated way some. transparency of determining and showing to all involved some of the results of these stress tests," White House spokesman Robert Gibbs said. His comments followed reports in the New York Times and Wall Street Journal on Wednesday that some of the results of the banking analysis, expected to be completed by the end of the month, could be made public.[24]
WASHINGTON, April 15 (Reuters) - The U.S. government will release some results of its bank stress tests in May as it tries to diagnose problems and stabilize the ailing banking sector, the White House said on Wednesday.[9] The U.S. banking industry is strong enough to weather a deteriorating economy that's the headline expected from the government when it reveals the results of its bank stress tests in the first week of May.[15]
The Federal reserve had ordered U.S. banks not to reveal the results of the stress tests, which are designed to check the capacity of the institutes to deal with the financial crisis.[25] The Treasury and Federal Reserve have instructed banks to not talk about the stress tests during the first-quarter earnings season, which is scheduled to wrap up for most of the major banks by April 24, sources said last week. They said officials are concerned that too much chatter from the banks about the stress tests could muddle the markets' reaction to the earnings.[8]
Tracking the market and economic trends that shape your finances. Mark it on your calendar -- but use a pencil, in case the government changes its mind again: The "stress test" results for the 19 biggest banks will be released on May 4, Bloomberg News reports, citing an unnamed Federal Reserveofficial. The regulators also plan to publish a paper on their methods on April 24, in an effort to bolster credibility of the process, according to the official, who spoke on condition of anonymity.[10] To prevent a run on low-rated banks, regulators have never disclosed CAMELS ratings or other test results. Each quarter, the Federal Deposit Insurance Corp. says how many banks are on its problem list and their combined assets, but it never discloses their names. It has even kept large banks off the list because people could guess which ones they were from the size of their assets. When the government started handing out money from the Troubled Assets Relief Plan last fall, it made the nine largest institutions take money whether they wanted it or not because "they wanted to hide the weak among the strong," says bank analyst Bert Ely.[26] At the height of the crisis over the winter, there were neither buyers nor sellers for the toxic assets. Saddled with the assets on their balance sheets, the banks sharply curtailed lending, threatening to throw the economy into a tailspin. At that point, pressure mounted from regulators, the Federal Reserve and Congress on the Financial Accounting Standards Board to loosen accounting rules so that the toxic assets' book value could be marked up to buttress the banks' balance sheets - conveniently raising the assets' potential sales price at the same time. In late March, days before the meeting with the bank CEOs, Geithner and Obama unveiled the government subsidies for buyers, drawing big names like Blackstone and Pimco into the market to purchase the assets from the banks and resell them. Even with the accounting fix and the massive offer of government leverage to buyers, bankers are turning up their noses at the markdowns they will have to take on assets that once represented a large percentage of their equity.[12] Precisely, said Massimo Calabresi in Time. The banks are balking at selling their toxic assets at today's market prices, despite Obama's appeals and our "massive subsidies." The stress tests could be the "weapon" Team Obama needs to make banks "clean up their acts," and balance sheets.[5] The stress tests are part of the administration's multi-faceted financial stability plan, which include a public private-partnership for buying banks' toxic assets, mortgage market support and a business-consumer lending facility. The assumptions include both base-case and worst-case scenarios, as well as adverse market shocks.[27]
A move to clearly distinguish between mostly healthy and more troubled banks could lead to a clear hierachy of institutions as the sector seeks to exit the worst financial crisis in decades. The stress tests were introduced by the Obama administration in an effort to assess the depth of the damage to banks, and to evaluate how much government cash they might need to return to health.[24] The tests, which subject banks' balance sheets to scenarios including escalating job losses and declining home prices, are a centerpiece of the Obama administration's financial rescue efforts. The results will help officials divide banks into three categories: those that need more capital either from the government or private investors; those that are healthy; and those that are too weak to survive.[28]
AS THE Obama Administration works to complete its stress tests for gauging the health of major banks, it could confront another problem: how to pay for shoring up any weaknesses the tests reveal. No one yet knows the extent of the banks' needs. But a senior Administration official said yesterday that this would be clear once tests on the country's 19 major banks were done and the results released early next month.[1] The Obama administration has decided to reveal certain details about how 19 of the country's biggest banks performed under their "stress test" in hopes to build confidence in the financial system. Although all of the banks are expected to pass, some will be ranked healthier than others, so the administration will seek to reveal the details in a way that informs investors without unnerving them.[29]
The stress tests have been something of a hot potato for the Obama administration more than two months ago. Analysts have worried that the process might not be transparent enough for the markets and could have unintended consequences, such as creating a weak/strong division among the participants. Others have said that the tests are nothing more than political theatre in that financial institutions are regularly subjected to such testing by bank examiners.[27] The Obama Administration is supposed to release the results of the bank stress tests that were conducted a few weeks ago.[30] WASHINGTON (Dow Jones)--The Obama administration will release some of the results of its bank stress tests early next month, the White House said Wednesday.[31]
The government set up the framework to assure the free flow of information that would allow investors to make informed decisions, but didn't generate the data or pass judgment on it. The Obama Administration could undercut the environment created by this masterful piece of legislation by releasing the results of "stress tests" of the nation's 19 largest banks.[32] Now that tests of the 19 largest banks are almost done, Geithner finds himself in a no-win situation: If he discloses the results, depositors and investors might flee the weaker banks and potentially drive them out of business. If he doesn't disclose the results, the public might assume the banking system is worse than feared or that he is going back on his pledge to improve transparency. Geithner is under intense pressure from those who want the results made public and others who want them kept private. "It is absolutely asinine that somebody would announce we're going to do stress tests for banks and we'll give you the answer in 12 weeks," Wells Fargo Chairman Richard Kovacevich said during an appearance at Stanford University.[26] The letters followed public statements from bank executives about the tests, including Wells Fargo & Co. Chief Executive Richard Kovacevich's calling the process "asinine." Bank of America Corp. CEO Kenneth Lewis and Citigroup Inc. CEO Vikram Pandit both had alluded to strong performance on separate, internal stress tests in recent memos seeking to build employee confidence.[28]
The New York Times reports that the White House will publicly disclose the results of the stress tests of the 19 biggest banks in the country. The obvious reason for not disclosing the results of the stress test is the fear that it could lead to a self-fulfilling prophesy: Banks deemed to be poorly positioned for a prolonged economic downturn will experience withdrawals, fleeing employees and less access to credit, making them more likely to fail -- or at least threatening their ability to compete.[22] We'''ve already known that the banks receiving funds will not be allowed to fail. What we don'''t know is the extent of the credit damage, and just how much it'''ll take to make these companies solvent. The delay from results to announcement could give the administration time to use them best to '''cheer up''' the markets. The news could be great, and the administration could be concerned no one will believe them''' It could be the reason why U.S. regulators have detailed the procedures behind them. The interesting thing for investors is the potential for the results of these tests to send the market sharply up or down.[33] But. first regulators are going to publish a paper explaining the stress tests on April 24. It's the latest evidence that the whole concept is becoming something of a fiasco for the administration, which is now going to great pains to maintain its credibiliy as a serious test for banks, while not spooking investors.[34]
U.S. regulators are preparing a guide to explain to the public the bank stress tests and how to interpret the results, sources have told Reuters.[9] Procedures for releasing information on specific firms, which will expose weaker banks and boost confidence in stronger ones, are still under discussion. Bank regulators may also encourage each of the 19 firms to release an individual statement on the results of its own stress test, another person familiar with the matter said yesterday.[10]
The markets are anxiously anticipating the outcome of the tests. The results are expected to further highlight which banks are on their way to recovery and which institutions will need further government assistance. Regulators are still working on a process by which the government can release industry-wide results and banks can release their own results, in an orderly way, the sources familiar with the policymakers' talks said.[8]
"The question is whether the results of the stress tests are more like a bank exam or a significant event," one of the sources said. Banks are not permitted to release the results of regulatory examinations, which include a 1-to-5 rating of their overall health. Officials have said they recognize the intense interest surrounding the results, and want to be as transparent as possible while still ensuring that the results are not leaked in a chaotic way.[8] If, on the other hand, Treasury only releases aggregate data, there's a chance it could be worth something. I guess I'd much rather have accurate overall data, so we know how screwed our banking system is, than bogus individual data'Also, if Treasury releases accurate overall numbers, and the healthier banks start releasing their own numbers unilaterally, then we should eventually be able to identify the comatose banks. His conclusion: 'I now expect a clean bill of health for the banks from the Stress Tests. For most banks this will turn out to be incorrect before the end of the year. At that point, the de facto insolvency of much of the U.S. border-crossing banking system will become so self-evident, that even the joint and several obfuscation of banks and Treasury will be unable to deny the obvious.[35] In addition to looking for money in off-budget and off-balance sheet places (and out of sight of Congress), the U.S. Treasury has also tried to hide true extent of the problems of the U.S. banks.'' I addition to supporting the FASB's recent proposals for increasing managerial discretion as to the way illiquid assets are accounted for (that is, condoning the issuance of another license to lie), the Treasury appears to be using the 'Stress Tests' announced as part of the Financial Stability Plan, as a mechanism to play for time and gamble for resurrection. I base this on what I have been picking up about the reality of these Stress Tests.[18]
According to preliminary results leaked to the New York Times, all 19 banks with assets above $100 billion that are subject to the Treasury'''s '''stress test''' are bound to pass the test.[2] Requirement for $100 Billion-Plus Banks : All banking institutions with assets in excess of $100 billion will be required to participate in the coordinated supervisory review process and comprehensive stress test[18] JPMorgan Chase ( JPM.N ) Chief Executive Jamie Dimon said on Thursday "we think we'll do fine under any stress tests measurement," adding that the bank could immediately repay the $25 billion it received from the government.[36]
Government stress tests on the 19 largest U.S. banks and thrifts are expected to be completed this month and the most recent data available for the holding companies likely being scrutinized shows that most appear in decent shape.[16] "There's just a lot of concern, period, for anything the government does and how well thought through it is," says Kathy Boyle, president of Chapin Hill Advisors in New York. "Forcing everybody to take money solves that immediate crisis for moment, but all they did was delay the problem for six months." Even those who believe the worst has passed for banks foresee skepticism from the stress tests. "No matter what the government is going to do right now in regards to this test, somebody's going to be able to pick it apart," says Gary Hager, president of Integrated Wealth Management in Edison, N.J. "It doesn't seem to matter what the government does. It's second-guessed at all levels."[37] In similar fashion, the markets seem to be expressing such Audacity of Hope when it comes to the stress tests of the 19 banks. This is where the markets could really hit choppy seas. Fears that the government would nationalize the banks after the Treasury announced its stress test plan in February drove the Dow Jones Industrial Average to a demonic 666 intraday low on March 6 (as economist Ed Yardeni tongue in cheek has noted) and to a dreadful close on March 9. Fears that the banks would be run by a government that wouldn't think twice about upending contracts and siccing the IRS on banker bonusesand anyone they do business withsent the markets into a tailspin.''''''[4] If anybody needs a stress test these days, it's Timothy Geithner. In February, the Treasury secretary said his department would put the nation's largest banks through a "stress test" to see if they could survive a more difficult economic environment.[26] The stress tests were designed to build confidence that the nation's largest banks could weather a severe and prolonged economic downturn. Regulators are trying to determine how much assistance banks might need to continue lending in such circumstances.[7] Though, the banks may have no choice. Since the 1930s, regulators have been able to force banks to shore up their balance sheets by selling assets, even at prices lower than the bankers would like. The stress tests give the supervisors the ammunition they need to do that.[12]
As if we haven't gone through enough stress this past year, now we need to worry if our bank will pass the government stress tests. For the last two months 200 federal examiners have worked/audited the nation's biggest banks to determine how these banks would hold up if the recession deepened.[38] The real test now will be whether the federal government is willing to stand by the results of the stress tests and let the banks with poor prospects for survival fail. If they don't do that, these stress tests really don't serve any particular purpose.[22] Nineteenth in a 19-man race. That's the analogy Wall Street observers fear will best describe Citigroup in a few weeks when the federal government completes its bank stress test.[17]
What's more, the very announcement of the stress tests' existence caused all manner of confusion and second-guessing in the markets, none of which was helpful. Most profoundly, Congress passed executive-compensation rules which mean that no banks have any interest in accepting government funds should they be found to have insufficient capital. For me, the fact that all these things managed to happen so quickly after the stress tests were announced is an indication that the stress tests probably weren't such a good idea in February after all.[39] A chorus of bank analysts and economists are questioning the rigor of the stress tests if the results are really so positive. Just six months ago, the entire financial system was brought to its knees from the stress of capital market losses and rising mortgage defaults. "If they come out and say all the banks are fine, no one's going to believe the test," says Christopher Whalen, managing director at analysis firm Institutional Risk Analytics.[15] In a smart piece that for some reason isn't on the front page, the WSJ declares that the result of the stress tests combined with the banks' first-quarter results "could lay the groundwork for a new phase in the financial crisis."[13]
"We expect the stress test to demonstrate that the 19 banks are all well capitalized even under the stress test's worst-case scenario," says Scott Talbott, senior vice president at the Financial Services Roundtable, which represents the largest financial institutions.[15] The federal government plans to release details of the stress tests being conducted on the country's 19 largest financial institutions in two stages, a bid to clarify how the much-anticipated process will unfold, according to government officials.[40]
Some results of the stress-tests being conducted in the U.S. on the country's 19 largest banks, may be made public, to clearly define the healthy banks from the weaker ones. Until now, the U.S. government has tried to treat all banks equally, pouring cash into both strong and struggling institutions to prop up the financial sector.[41] NEW YORK/WASHINGTON (Reuters) - U.S. banks have been told to keep quiet for now about results of a sweeping regulatory checkup into their health, raising questions about whether investors are being wrongly kept in the dark. Government officials have been less than clear about how the results of these "stress tests" of 19 big banks will be released.[42]
The Treasury would not comment. Goldman and other banks are keen to pay off the Government as soon as possible, in particular because they want to remove constraints set by the White House on executive pay, which banks complain will hamper their ability to compete. The Treasury forced America's biggest banks to participate in its rescue last October - to calm fears about the industry's stability and to avoid singling out weaker banks - regardless of whether they needed extra cash. Kenneth Lewis, the chief executive of Bank of America (BoA), has said that he is keen to repay his bank's loan by late this year or early 2010, depending on the economy. BoA is to report its first-quarter results next Monday, when it is expected to give an update on when it may repay the Government. Five small U.S. banks have repaid their loans and three more have announced plans to do so imminently. The U.S. Government has pumped hundreds of billions of dollars into American banks in recent months and guaranteed hundreds more billions of dollars of their most toxic debts.[3] "The Treasury in May will release the amount of cushion that each bank needs in a more severe economic scenario," says Andrew Williams, a Treasury spokesman. He says the goal of the test was to "increase lending by instilling confidence in banks even if the economy worsens." It's not like the government doesn't have a plan.[15]
Any test can be passed when the test is rigged. The government has already committed to giving these large banks billions in additional money through the PPIP plan. That is the governments sole solution to credit crisis; buy toxic assets from the banks with taxpayer money and hope that the market for theses assets recovers in a few years time.[38] There is just one way to make the U.S. government's policy towards the banks work.'' That is for the Congress to vote another $1.5 trillion worth of additional TARP money for the banks - $1 trillion to buy the remaining toxic assets off their balance sheets, and $0.5 trillion worth of additional capital.''''[18] There still will be no fiscal resources available to sanitise the banks' balance sheets by purchasing or guaranteeing the old toxic assets and new bad assets. Consider this core consumer prices rose slightly in March thanks primarily to an 11% increase in the cost of tobacco products (there's that Obama tax increase), and smoking is much more prevalent in the population among the poor. Which isn't to argue against cigarette taxes; they're a valuable public health tool. It's just to note that pretty much any way you slice recent economic data, things end up being harder for those with lower incomes.' More proof: 'The Fed banks in San Francisco and New York, which cover richer portions of the country, reported slower rates of economic decline than the rest of the nation (although curiously, so did the Chicago Fed, whose region includes Detroit). 'We examined separately the impact in states that adopted an MLDA21 on their own and those that were coerced by the FUDAA.[35] For all the bailout money they've received, some of America's biggest banks are still unwilling to sell many of the toxic assets clogging their balance sheets. The prices being offered, they say, are simply too low, and neither massive government subsidies for buyers nor encouragement from President Obama has thus far been sufficient to change their minds.[12]
There still will be no fiscal resources available to sanitise the banks' balance sheets by purchasing or guaranteeing the old toxic assets and new bad assets. At that point, only the '''good bank solution', which requires either a serious hair cut for unsecured creditors or a mandatory conversion of debt into equity will be viable, simply because the bad bank solution requires additional public money which isn't there. (You creating a new good bank out of the assets of the old bank and the insured deposits and counterparty claims on the old bank, leaving the unsecured creditors of the old bank with a claim on the equity in the new good bank; a bad bank requires funds to buy the toxic and bad assets from the old bank and addition resources to capitalise the bad bank).[18] Anything less than full disclosure is sure to raise shouts of outrage, and for good reason: The public's business ought to be conducted in public. The Trouble Asset Relief Program has treated strong and wobbly banks alike by pouring government money into both. This has provided needed cover for weaker banks that received TARP funds along with more robust banks.[32]
How each firm performed in the government trials would certainly qualify. Looking at the balancing act between disclosure and the concern that banks that get poor grade for the "stress test" will face sell-offs in their stocks, the government has decided to lean toward telling the public the results of its work.[23] The stress tets are rapidly losing credibility due to lack of transparency, the debate about how much to disclose with respect the conduct of the tests and the test results themselves. It has become a public relations nightmare and the lack of transparency is fomenting distrust and the outcomes will not instill confidence in either the banking system or the banks themselves.[39]
Martin Weiss, a bank analyst and president of Weiss Research, also thought it was a mistake to announce the stress tests. Now that it's done, "The only solution is to get the information out as clearly as possible, as soon as possible," he says. "This will reward the safer institutions." White House spokesman Robert Gibbs said that by early May, "you will see in a systematic and coordinated way. some of the results of these stress tests."[26] The bulk of the information provided to the authorities by the banks is private information to the banks that is virtually impossible to verify independently.'' Too many banks have lied about their exposure too many times for me to feel confident about the quality of the information the banks have been providing as part of these Stress Tests.[18]
A perception that the standards are low for banks in terms of economic projections and capital needs also could cause problems. "The main reason the stress tests could cause another leg down would be a very weak stress test in the sense that they really didn't push the scenarios on the banks," Lutz says. "That's one issue that could knock us down."[37] The stress tests are assumed to be similar to CAMELS ratings, "with a little more emphasis on looking forward," Ely says. Banks are supposed to report how they would fare under two economic scenarios. The more severe assumes that gross domestic product will decline 3.3 percent this year and rise 0.5 percent next year, unemployment will be 8.9 percent this year and climb to 10.3 percent next year, and that housing prices will fall 22 percent this year and an additional 7 percent next year. There is debate over whether this scenario is stressful enough.[26] All 19 of the banks are expected to pass the stress tests, meaning that each will be considered able to weather a defined deterioration in economic conditions over the next two years.[3]
Long-suffering Citi is expected to be among the weakest of the 19 banks undergoing government stress tests.[17] It looks like the markets will be getting a peek into the results of Uncle Sam's stress tests on the banks sooner than most had expected.[14] Banks are getting mixed messages from regulators about whether the stress tests should be considered a bank examination, which is not permitted to be disclosed, or a material event, which triggers a disclosure requirement, according to an industry source.[42] Some market players continue to express concerns about Citi's capital adequacy in the face of severe headwinds buffeting the financial sector. With the outlook for financials getting more harrowing since talks of the tests were floated, it's the next several months that are causing some hand-wringing. What's unclear at this point is how much the regulators will disclose to the public about the performance of a specific bank, given the damaging effect such information could have on the market. The Treasury and Fed, however, are expected to publish their analysis methods and market assumptions applied to the test on April 24.[17] Treasury has spent much of the $700 billion Congress allowed it to distribute, and the Fed and Federal Deposit Insurance Corp. also have provided assorted subsidies. When regulators describe the banks' performance, they are likely to pursue a middle path, revealing mostly industrywide results while encouraging banks to disclose some specifics about their own performance.[28] During that time, the participating banks -- the nation's 19 largest -- will hold individual meetings with banking regulators as well as Treasury officials to discuss the results and remedies.[27]
The official results are due by the end of April but the upbeat mood in the banking sector was already reflected in the 30% stock price rally in the run up to the Q1 earnings season. The major three commercial banks had already noted that they were profitable in the first two months of the year, and Wells Fargo announced that it expects to post a record net income of $3 billion when it reports results on April 22 (with combined net charge-offs of $3.3 billion for both Wells and Wachovia from $6.1 billion in the fourth quarter).[2]
A growing number of banks who took TARP money want to give that money back. Goldman Sachs is moving to raise $5 bn in common equity to''pay back half of its $10 bn taxpayer loan. Wells Fargo, Bank of America, BB&T;, all have indicated they want to pay back their TARP money. Not to sound too contrarian,''''and thinking this throughis that a good move? Why do I ask? Read on. It was also a week in which President Barack Obama marked the 2,000 th transportation project to be approved under his $787 bn economic relief package.[4] Stronger banks will emerge as winners and will not need federal bailout money, while weaker ones will not be allowed to go under but instead be given more time to raise capital as well as government assistance to do so. That creates a sort of economic bell curve that has some analysts worried about the future of an industry in which bad businesses are artificially propped up--perhaps at the expense of good ones.[37]
WASHINGTON (AP) — The report cards are almost ready. Federal regulators soon will announce how the nation's 19 largest banks performed on tests gauging their ability to withstand worsening economic conditions. The agencies performing the tests — which are coordinated by the Federal Reserve — will put out a "white paper" on April 24 detailing their methods, according to a government official.[28] An official at the Federal Reserve said on Thursday that results of the tests, designed to see how the nation's 19 largest banks would fare should the U.S. recession prove unexpectedly severe, would be made public on May 4.[36]
Which means bank earnings could be hung up for some time to come. Watch this: Other analysis from Tyler Durden at Zero Hedge (Durden is to be respected, he's a brilliant, formidable footnote digger) of Federal Reserve data shows that the banks have ''roughly $8.1 tn in loans and other assets, which include $5.3 tn in potential Kryptonite securities and other assets. Banks have written down only about $1.2 tn against these assets.''''[4] Worth noting is that GE did not factor in at all any economic benefits from the government's stimulus spending. Deutsche Bank's Nigel Coe, a notably sharp, shrewd bank analyst, did his own stress-testing of GE and''figures that unrealized losses on the GE Capital's $436bn-worth of assets in real estate, loans and securities could hit $50bn this year, sinking the parents' numbers deep into the red.[4] The tests are being conducted to determine if the nation'''s 19 largest banks have enough capital to withstand loan losses over the next two years if the recession worsens. The hope is that those banks that do not have enough capital will seek help, but the government does not rule out taking more direct action to remedy the problems.[43]
GE Capital's profits nosedived 58% and NBC Universal plunged 45% as a blisteringly bad advertising climate has torched all media companies, largely due to the cliff drop in ad spending as the automotive sector nears bankruptcy. GE says its finance unit will still turn in $5 bn in profit this year, or a third of the parent's net income, down from 40% to 50% in prior years. Though the Treasury is not stress-testing it, GE did do its own internal stress test based on various measures and came up with $18 bn in companywide losses.[4] Forward Looking Assessment - Stress Test: A key component of the Capital Assistance Program is a forward looking comprehensive "stress test" that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.[18] ' Obama is using misdirection to distract people from the fact that his administration has yet to provide a framework for resolving troubled financial institutions that cannot save themselves. He said that "the stress tests. will soon tell us how much additional capital will be needed to support lending at our largest banks."[11]
The Obama administration will disclose details about its banking stress tests and what capital participants may need in a two-stage process beginning next week, CNBC has learned.[27] The WSJ reported yesteday that the the Obama administration is considering making public some results of the stress tests.[19]
The Obama Administration could put troubled banks into receivership, which is another term for nationalization. Both Geithner and President Obama have all but ruled out this option. All of this is happening against a mood of growing public anger over the bailouts. With little money left, President Obama would need to use his political capital with Congress to try and get more money and at the same time risk losing his popular support with the public. In a private meeting with bankers, Mr.Obama said he is the only thing standing between them and the "pitchforks."[44] According to reports in The New York Times and Wall Street Journal, the Obama administration is gearing up to disclose the findings on the condition of the 19 largest U.S. banks in an effort to bolster confidence in the financial system and drain out some of the uncertainty that has been hanging over the banking sector.[14]
WASHINGTON, April 16 (Reuters) - U.S. regulators on Thursday released some details about their bank "stress tests," moving to bolster the credibility of a process some investors worry might not reveal the financial sector's true health.[36] Within weeks, the stronger banks could emerge free of government shackles and flush with new funds, with weaker ones still reliant on federal largesse. That would transform how investors and the government view the financial sector.[7] Up until now, the government has pretty much treated the banks equally, but in the next few weeks, some of the stronger banks could find themselves free of government interference while the others would still be dependent on taxpayer funds, effectively transforming "how investors and the government view the financial sector."[13]
The government is close to having the results of its "stress tests" of large U.S. banks. It has taken the financial firms' balance sheets and set up models''for what will happen if the economy worsens. [23] For instance (what follows is a pure hypothetical - I know of nothing that would lead me to question the financial soundness of Abbey), I would not expect the Spanish government ever to bail out Abbey (owned by the Spanish bank Santander), but I would expect the UK Treasury to show an active interest. Individual parent banks may decide to try to rescue their foreign subsidiaries, even when the subsidiaries in question appear to have gone belly-up by normal commercial standards. An extreme example of this is HSBC - reported to have incurred losses estimated to be somewhere between $30 bn and $62 bn (accounting does not appear to be an exact science) on its U.S. credit card issuer and subprime lender, Household Finance Corporation (HFC), now renamed HSBC Finance, which it acquired at the end of 2002.'' Even though HSBC announced, in March 2009, that it would shut down the branch network of its HSBC Finance subsidiary in the U.S, it is continuing to operate the HSBC Finance credit card arm. HSBC could, in the opinion of many observers, have saved itself a bundle by cutting its losses and walking away from HFC when the scale of the subprime debacle became apparent late in 2007.''[18] In February, Treasury Secretary Timothy Geithner announced the Financial Stability Plan and said it would conduct a battery of tests to gauge the soundness of the nation's 19 largest banks, including Citigroup and Wells Fargo.[15] The main objective of the tests is to check whether the banks' capital is adequate, ahead of possible new recapitalisation projects made by the Treasury. (AGI).[25] Some banks didn't want the TARP money to begin with. "If banks now claim they want to return the money because they don't need it, why do they have to raise new capital to replace the money from we the people in order to repay the government?" asks former Treasury secretary Paul O'Neill.[4] Banks that are found to need more money would then have six months to raise it, or take funds directly from the government in a new round of capital injections.[45]
If the capital requirements of banks prove large, the Government may need billions of dollars in federal aid back from strong financial companies.[1] Some results of the tests, intended to show whether major financial institutions need to raise more capital, are due to be released by the federal government on''May 4th.''[4] Wayne Abernathy, executive vice president of financial institutions policy and regulator affairs at the American Bankers Association, said the government needs to provide information about the results but also protect examination data. "I don't think they can ignore the appetite they have created for this information," Mr. Abernathy said.[7] In the European Union, the relevant sections of the financial services action plan are now dead and need to be replaced unless we (a) get a single European supervisor and regulator for border-crossing banks and other systemically important financial institutions and (5) create a supranational fiscal Europe capable of dealing with insolvency threats to border-crossing systemically important financial institutions. ''''Without a single regulator-supervisor and a sufficiently developed '''fiscal Europe', the principles of mutual recognition and the "single passport", a system which allows financial services operators legally established in one Member State to establish/provide their services in the other Member States without further authorisation requirements, will not be permitted to operate in the field of banking and other systemically important border-crossing financial institutions and products.''[18]
"The problems is, I get the sense that the regulators don't have a plan to go along with the results." This week, banking giants Goldman Sachs and JPMorgan have reported better-than-expected profits and have hinted that the worst of the economic storm might be behind them. What's more, though Citi is widely seen as the definition of a troubled bank and received $45 billion in rescue cash, there is some speculation Citi might eke out a small first-quarter profit when it reports this morning.[17] Industry groups have groused about regulators forcing healthy banks to take bailouts. Some smaller banks already have returned the government's money — plus interest — because they were unhappy with new conditions Congress had imposed. Large banks, including JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc., have said they want to return the bailout money soon.[28] The government has made it clear that it will accept the repayment of funds only from banks deemed healthy enough to operate without the assistance. It is still trying to determine whether the banks that return the TARP money would still be able to enjoy other government benefits that have been extended to banks over the last few months. In a piece inside, the NYT details how banks, including Goldman Sachs, have been benefiting from " an indirect subsidy " in the form of a federal government guarantee on their debts. Economists say the value of this assistance is "incalculable" because it allowed banks to continue operating at a time when the credit markets were completely frozen.[13]
A senior Administration official said no company would be allowed to repay money without regulators first ensuring the bank was healthy and able to continue making loans to support economic recovery. Administration officials have said it is likely they may need to ask Congress for more money, but they say such a request probably would not come any time soon.[1] One possible solution: Aggregating the data provided by the banks so the government could provide a broad snapshot of the banking industry's health without disclosing firm-specific data. Last month, Comptroller of the Currency John Dugan said "there will be definitely some information that will be provided" once regulators make their decisions. "Exactly what that will be and when it will be provided will come forth later," he said at the time.[7] Banks that need more capital will get six months to raise it from private investors or take cash infusions from the government. It isn't clear precisely what information the government might disclose. It remains possible the data won't be specific to individual banks.[7] Some within the administration believe a certain amount of information needs to be released in order to provide assurance about the validity and rigor of the assessments. These people also are concerned that the tests won't be able to fulfill their basic function of shoring up confidence unless investors are able to see data for themselves. The problem is this -- if the administration releases information suggesting that the tested banks are all basically fine, then the data is worthless.[20] Some within the administration believe a certain amount of information needs to be released in order to provide assurance about the validity and rigor of the assessments. These people also are concerned that the tests won't be able to fulfill their basic function of shoring up confidence unless investors are able to see data for themselves. Staff at the various regulatory agencies have been discussing the matter for several weeks and are expected to brief top regulators as soon as this week.[7]
Regulators were also concerned about banks selectively leaking some of the information, which might give investors a distorted picture of the institution and its relative performance against rivals that might choose not to disclose any information.[3]
Some experts complain there is too much secrecy surrounding the tests, which are designed to determine whether the banks would be able to weather a steeper economic downturn. They say banks should release results as they learn them, because anything else goes against traditional disclosure rules that govern what companies must tell investors.[42] The fear then was that banks unable to broadcast encouraging test results could be punished by investors.[28]
The test results will include a capital recovery plan for banks that regulators determine would be short of capital if the economy's downturn gathered steam and unemployment shot unexpectedly higher.[36] Releasing results for individual banks "would be a significant change in policy," says Dick Bove, a banking analyst with Rochdale Research. Regulators have given banks safety ratings for decades, but have always kept them secret. Their main tool is the CAMELS rating, which stands for capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk.[26]
The anchors still exist, even with the relaxation of the mark-to-market accounting rules, which effectively lets companies warehouse bad assets in the 'held to maturity' line item on the balance sheet, and not sock it to earnings. Government officials have said they may need to spend another $2 tn on the bank bailout, a bailout that's looking more and more like Mr. Toad's Wild Ride. Meaning, they believe there is a $2 tn hole still in the banks' books (at least).''''[4] GE has at least $50 bn. All of these assets and liabilities must be sluiced back onto the balance sheets for fiscal years starting after November 15 of this year, under new accounting rules. Those sums will cause bank capital ratios to gyrate faster than a compass held over the North Pole.[4]
In a recent report from Goldman Sachs, the firm's research analysts calculated that the best of the banking industry's toxic assets are carried on banks' books at an average of $91 (on a bond with an original $100 price).[12] Goldman Sachs Group Inc. successfully raised $5 billion in equity aimed at helping it repay $10 billion in Troubled Asset Relief Program, or TARP, capital it received in October. Other large financial institutions don't appear to be keen to tap the equity markets any time soon, but the recent revival in their stock prices has made the concept more appealing.[7] In a must-read op-ed piece (well, must-read for anyone who's interested in the ins and outs of Goldman Sachs), William Cohan lays out a convincing case for why Goldman shouldn't be so cavalier about not needing government funds when it has benefitted every step of the way from the government's actions. Although Goldman Sachs was eager to announce it made a first-quarter profit of $1.8 billion, it failed to mention that because of a change in its fiscal year, it didn't have to include December into its numbers, a month when it lost $1 billion. While Obama tried to sound an optimistic note on the economy yesterday, he didn't predict blue skies. "By no means are we out of the woods just yet," Obama said as he acknowledged that "there will be more job loss, more foreclosures and more pain."[13]
According to press reports, the idea is to guarantee the illiquid assets in separate but still bank-affiliated vehicles with EUR200 billion in government funds. Press reports point to a far more radical solution in the making for problem banks, such as Hypo Real Estate (HRE), some state banks, as well as Commerzbank.[2] Wells Fargo has received a $25 billion government bailout; Bank of America and Citigroup each received $45 billion.[28]
No failures will be permitted, but there are different ways to pass: on the bank's own balance sheet strength, or with government assistance. Since the purpose is to stabilize the financial system, this isn't "rigging the test," it's making sure the program succeeds. When you take your car in to a mechanic and tell him to check the fluids, is it cheating if he actually adds oil or coolant to save your car, and charges you accordingly? There are plenty of things to criticize about the government's handling of this crisis, but this seems like a red herring.[38] The Stress Tests focus on the 40% of the banks' balance sheets consisting of securities, rather than on the 60% consisting of conventional loans.''[18] In order for the stress test to be credible, not all of the banks will pass the test. What happens when your bank is announced that it failed this test? Will this cause a run on the bank? What about the share price? I would bet it would implode. Who would want to own shares of a bank that the govt has deemed is weak after this massive move in stock prices. Another great scenario could be that despite all of the recent bailouts, there is a need for more banks to be bailed out again.[38] I had read that the test was a suite of tests that banks already knew how to run. If not, the govt should have released details and sought public approval for the stress test - before beginning. For me, this is hindsight.[32] Hager is in the camp that the recent tumult over the stress tests is overheated and that the major banks will emerge fairly unscathed. That sentiment drives back the point of whether a report that shows the industry in relatively good health will have credibility.[37] The stress tests, announced in February, were designed to see if banks are adequately capitalized.[45] The stress tests of top banks, that are now wrapping up isn't really a pass/fail sort of thing.[46]
The NYT notes that the discussion over what to release from the stress tests "underscores the delicate balancing act by the government" as it tries to build confidence in the financial system.[13] Since announcing the stress tests earlier this year, the government hasn't made clear what, if anything, would be disclosed about the assessments.[7]
The Treasury, Federal Reserve and FDIC will have a colossal juggling act next month, when it announces details of the stress tests.[4] In the meantime, the Treasury Department and Federal Reserve have asked banks not to discuss the exams publicly out of concern that information will trickle out inconsistently and create market chaos, according to a source familiar with the talks between the government and the banks.[42]
Othwerwise, I think releasing bank-level data would not only be useless in itself, it would result in useless aggregate data, since the numbers have to be internally consistent. P.S. Also, if Treasury releases accurate overall numbers, and the healthier banks start releasing their own numbers unilaterally, then we should eventually be able to identify the comatose banks. Paradoxically, releasing aggregate data alone seems like it could lead to useful aggregate and individual information, while releasing individual data seems like it would lead to inaccurate data at both levels. Okay, I'm done with this.[20] I know Salmon and others think opacity is dumb and possibly self-defeating. My thinking is this: If Treasury ends up having to reveal results about individual banks, then it strikes me as highly unlikely that the data will be meaningful.[20]
The White House said yesterday that the Treasury Department'''s '''stress tests''' on banks would be wrapped up by the end of the month, at which point the government would begin revealing the results.[43]
Some suspect Treasury's real reason for the tests was to persuade Congress to put more money into banks. "This had a very strong political agenda," Weiss says. It bought Treasury more time to figure out what to do and "to justify the actions they ultimately decide to take." Weiss says his main objection is that "the tests are upside down.[26] Treasury says the tests "will allow supervisors to determine whether an additional buffer, particularly one that strengthens the composition of capital, is needed for the bank to comfortably absorb losses and continue lending, even in a more adverse environment."[26] If Treasury says a large number of banks failed the test but doesn't name names, it could create a run on the entire banking system.[26]
Any systemically important financial institution has to be backed by a central bank (for short-term liquidity support) and by a Treasury or ministry of finance (for recapitalisation and other long-term financial support when insolvency is the issue).'' If both your liquidity and your solvency are publicly insured or guaranteed (at highly subsidised rates), you need to be regulated and supervised, lest you be tempted to take insane risks.[18] Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.[18] No country should ever find itself in position of Iceland, with systemically important banks or other financial institutions that are too large to save.'' The fiscal spare capacity of the government (its ability to raise future primary (non-interest) surpluses has to be sufficient to take care of any possible solvency gap in the systemically important part of their financial institutions.[18]
We should not expect the U.S. taxpayer to stand behind foreign subsidiaries of U.S. banks and other systemically important U.S. financial institutions, unless a convincing case can be made that there is a material direct U.S. financial exposure.'' If all the parent has at stake in its foreign subsidiary is its equity in the subsidiary, the U.S. tax payer will not bail out the foreign subsidiary.[18]
WASHINGTON (Reuters) - U.S. regulators are preparing a public guide to bank "stress tests" to explain their methodology and how to interpret industrywide results, sources familiar with the planning told Reuters on Tuesday.[8] The administration is floating three possible scenarios about what to do when the "stress tests" results are made public in about two weeks. They could show that it's thumbs up for banks, that they will survive further economic decline over the next few months. This is a long stretch for all 19 banks to come out on top. Most probably, there will be a few that don't pass muster.[44]
The securities (including the toxic waste) is where most of the old problems of the banking sector are concentrated, that is the problems incurred as a result of the pre-August 2007 speculative frenzy.'' The loan book contains the stuff that will go bad as a result of the steep and deep contraction in real economic activity the U.S. has been in since Q4, but that will not show up in the banks' reports until this summer at the earliest.[18] Eurozone banks are also exposed to the U.S. downturn, especially through expected losses on securities holdings. How are eurozone governments responding to their toxic asset overhang? Both the ECB and the European Commission were reported to be working on consistent draft guidelines for '''bad bank''' while leaving each country its own strategy. The rapidly worsening situation in Ireland - the Economist defines it as a depression - for banks, despite liability guarantees, forced the government on April 8 to introduce its nationwide '''bad bank''' scheme.[2] Importantly, the assets will be transferred at an appropriate discount, thus forcing the current stakeholders to take a haircut. The government requires the banking sector to cover any losses the toxic asset management company incurs at the end of its mission. While RGE thinks this is an efficient approach, the necessary upfront outlays to capitalize the investment fund weigh further on the country'''s strained public finances and funding costs.[2]
For instance, tier one capital as a share of (unweighted) assets could be made an increasing function of the value of the assets.'' Gary Becker has made a similar proposal. Governments everywhere should be focusing on breaking up banks and keeping them small.'' [18] The government's efforts to analyze whether the nation's 19 largest banks have enough operating capital to avoid federal cash infusions had been receiving scant attention'''until serious questions began to arise over whether the process was flawed.[37] A senior U.S. Treasury official said the government will accept repayment of rescue funds from any institution whose regulator dubs it healthy enough to operate without federal capital.[7] While the stronger banks are expected to emerge free of government restraints, replete with new funds, the weaker ones are still likely to be reliant on federal funding.[41]
Concerns about transparency and whether the government has set the bar high enough to declare that a bank has adequate operating cash have some worried that a market that is perhaps overbought might suffer once test results trickle out.[37] On May 4, actual results of the test will be released, including what steps may be needed to address a bank's capital needs.[27] Also that some banks would need more shareholder-diluting capital once the results are released. It doesn't help that all the banks apparently had blowout quarters, which if they're being totally honest should make you wonder why they need any extra capital at all. At this point, we don't think anyone would begrudge the administration for doing an about face and admitting that they won't do much good. It's ok.[34]
Initial indications were that the administration wanted the results kept private, for fear that banks that did not grade as well would generate panic among investors and depositors alike. That's a position that hasn't set well with Wall Street, where uncertainty is often met with selling. "It does depend on how transparent they are," says Dave Lutz, managing director of trading at Stifel Nicolaus.[37] Wall Street's belief that bank stress-testing would be a non-event for the stock market has changed, and investors may not like the results.[37]
The banks that get the lower grades will be rewarded with more capital" and the stronger banks "will be effectively punished." Weiss wants the ratings disclosed so investors and bank customers can put their money in sound institutions. [26]
Since major banks have taken billions in federal bailout money, taxpayer advocates and policymakers — including House Financial Services Committee chairman Barney Frank, D-Mass. — have demanded greater transparency. Many want to know what the results will mean, and whether they could lead to additional bailouts.[28] The govenment's plan has always called for providing federal financial aid to companies that cannot rasie the needed capital from the private sector, which is the preference. The White House Wednesday tried to contain growing speculation about the tests: "Early in May you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests," White House spokesman Robert Gibbs said.[27] Experts say the results must be believable and the recovery plans clear, or officials risk further destabilizing the financial system in a way that will send the weaker banks into a downward spiral.[36]
While all of the banks are expected to pass the tests, some are expected to be graded more highly than others, according to the paper. Officials have deliberately left murky just how much they intend to reveal - or will encourage the banks to reveal - about how well the banks would weather difficult economic conditions over the next two years, according to the paper.[45] At a time when rivals like JPMorgan, Wells Fargo and others are showing signs of a comeback, there is increasing worry that Citi will find itself ranked at the bottom of a test in which no bank is technically expected to fail.[17]
If these tests point to a weaker banking system with United States being required to invest (read: bail out) banks that they'''ve already sunk billions into, it could be politically unpopular and hit the markets hard.[33] Large banks like BAC and WFC are refinancing billions of dollars of mortgages as fast as they can process and fund them. Large percentages of these loans are being sold to FHA. The impact to the banks' bottom lines is not just the fee income but getting loans off their books and offloading the risk to FHA (or FNMA or FHLMC).[38] The data is as of Dec. 31, and earnings and loan charge-off figures are for all of 2008. Some capital and loan quality ratios are not included for companies such as American Express ( AXP Quote ), Goldman Sachs ( GS Quote ) and Morgan Stanley ( MS Quote ) since the companies weren't required to file bank holding company data for Dec. 31.[16] In the current credit environment, that many be nearly impossible to do. The Administration has been asking banks not to divulge data on the testing when they put out their first quarter numbers. That stance undercuts normal disclosure rules for public companies which requires them to give out "material" information about their businesses.[23] Release of stress-test information could create a two-tiered banking system, or at least the perception of "yea" and "nay" banks in the public's mind.[32]
Discussions are still underway about what exactly will be revealed, but officials seem to recognize that leaks would be inevitable, and failing to disclose how the banks could weather a severe economic downturn might create even more uncertainty. "The purpose of this program is to prevent panics, not cause them," said one senior official. "And it's becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum." Banks that are in better shape, of course, are eager to announce it from the hilltop, despite the fact that the government has asked them to remain quiet. What does this all add up to? "We are going to have some separation between the haves and have nots," one banking analyst said.[13] The goal is to satisfy calls for transparency while allowing strong banks to provide some cover for weaker ones. It is "still under discussion" what details will be included in the May 4 announcement, the government official said. The banks last week received letters from the government asking them not to disclose results as part of their quarterly earnings announcements.[28] The results are expected to distinguish which banks are strong and on the path to recovery, and which firms remain in need of government aid -- and subject to caps on executive pay and other restrictions.[36] Government officials need to avoid a run on deposits. They need to avoid a run on bank stocks.[4] Should news break that a big bank came through the test poorly and will need to recapitalize--and thus be denied the ability to be aggressive in the marketplace--that could spur a selloff and drag the stock indexes lower.[37] "Our hope is that banks that are not healthy, or need help, will first and foremost seek that help privately, and then we'll take steps from there to assist them," Gibbs said. The tests are "a part of a longer process toward bringing some stability to the financial system," he said.[9]
The Federal Reserve had asked banks not to discuss the tests during earnings season, for fear of destabilizing markets.[24] The tests would determine if the banks have sufficient capital and could withstand a worsening recession over the next two years.[15] If a bank fails, it will have six months to raise capital. If they can't, they''may get an infusion of taxpayer money. Or be subject to a government orchestrated shotgun wedding.''[4] Banks that needed it would receive a capital buffer, most likely from the government.[26]
It isn't clear precisely what information the government might disclose. It remains possible the data won't be specific to individual banks.[20] Stronger banks may soon repay TARP funds and be free of government oversight, while weaker banks continue to jangle the tin cup and receive government handouts. Even with FDIC protection, it's not difficult to imagine that millions of hardworking people would move their funds to stronger banks and abandon those still receiving government aid. This would be catastrophic for banks struggling to get their books in order, and destroy whatever good TARP has done.[32] People would move money to the good banks and the bad ones would fail. The FDIC would take them over and hit up Congress for more money, which could result in a special tax.[26] President Obama promised transparency and that is what the American Public expected. It can't be any worse than it already has been. After all it should be better they where pumped billions of our tax dollars and never lent a dime of it to anyone, no they took and purchased other banks, and invested the money in foreign Countries. It is very unfortunant that we the American Citizens where penalized for all of the predatory lending, sub-prime lending, swaps, hedging, derivatizing, securitizing, and all the other crazy risky betting and trick these Corporate Greeders lined their pockets only to all this Country to go bankrupt.[22] Geithner has only about $35 billion of TARP money left to plug the remaining holes for the 19 largest banks.[12]
The IMF has figured that global credit losses from radioactive assets will amount to $4 tn. Banks worldwide to date have taken profit hits for about a quarter of those losses, or anywhere from $915 bn to $1.2 tn.[4] Level 3 assets, which are mark-to-myth, totaled $537.4bn at the end of last year, or dangerously near the entire $598 bn market cap for the whole S&P; financial sector at the end of 2008, economist Yardeni notes.[4] Obama seems to lack either the political will or the ability to make the truly tough calls when it comes to dealing with the financial crisis. The path of least resistance is the path that President Bush and his Treasury secretary, Hank Paulson, blazed with the Troubled Asset Relief Program (TARP) ' a program that has outlived its economic usefulness but doubled its political usefulness by becoming a blank check that the administration can use for everything from rescuing Detroit to bailing out the life-insurance industry. Congress's most urgent priority when it returns from its Easter recess should be to curtail the administration's TARP power. As evidenced by his speech, Obama has domestic-policy ADD. He won't confront the financial crisis directly until resource constraints force his hand.[11] The first is monopoly power.'' This causes banks to want to be large in any specific activity.'' It's common to every industry and to all human activity.'' That's what we ought to have anti-trust or pro-competition policies for.'' The second reason is that financial supermarkets can shelter non-systemically important profitable operations under the heavily subsidised public umbrella provided by the state to a few systemically important operations (deposit taking, payment, clearing and settlement systems, counterparty and custodial services) though lender-of-last-resort support (provided by the central bank) and through recapitaliser-of-last-resort support (provided by the Treasury).[18] "The secretary and the Department of Treasury have long recognized that transparency was important for taxpayers, important for the banks, and important for the overall stability of the financial system," Gibbs said.[24]
The news comes from sources in the know, who add that it is not yet known when the guide will be released, even though this should be between the end of April and the beginning of May, before the Treasury announces the banks' results for the first quarter.[25] The Treasury originally suggested it would defer to individual banks to disclose results.[7]
We will not see the kind of cross-border branch banks that we have seen during the past decades for very much longer.'' These foreign branches are not independently capitalised, have no independent, ring-fenced sources of liquidity, are often effectively managed from the home country (the country of the parent bank), are regulated and supervised by the home country regulator and supervisor, with lender-of-last-resort support (if any) from the home country central bank and fiscal support (if any) from the home country Treasury.[18] "The assessments are not yet complete," the paper cited Stephanie Cutter, a spokeswoman for the Treasury, as saying. "When they are, we'll work with the banks on how best to release the appropriate data and on what time-frame to ensure fairness and minimize market uncertainty."[45] As various Treasury officials have already said, all 19 banks are going to pass.[20] Now the Treasury, the White House and the big banks are bruiting about that the banks are well capitalized.[4]
Regulators will disclose at least some of the information, but no decision has been made on whether banks themselves will disclose some as well.[36] Some regulators worried about banks selectively leaking information, causing a possible bias against rivals.[7]
Chinese Walls in banks, auditing companies, rating agencies and other financial enterprises don't stop any information that is commercially profitable from getting across the boundaries.''[18] Conventional border-crossing banks and other systemically important financial institutions will become a thing of the past.''[18] Even if we agree that a particular bank or other financial institution is too large to fail, as soon as there are multiple fiscal authorities and border-crossing banks, there remains the unanswered question as to who should bail it out.''[18]
The administration has decided to reveal some sensitive details of the "stress tests" now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumoured to be weakest, the paper said.[45] "Most investors have basically written off the stress test, but it also has the potential to do damage," says Quincy Krosby, chief investment strategist at The Hartford. "They have to be very careful. This is going to require a tremendous amount of tact and diplomacy on the part of the administration."[37] Had the administration been clearer on how the tests were going to be conducted and how the news would be released, that would have soothed some fears that a large and unexpected shoe could be dropped. The alternative, then, "would have been to lay out the plan and announce it fully so investors knew what they were going to do from the beginning, rather than have the rumor mill generate the plan," Krosby says.[37]
The botched public relations campaign and a feeling that the government is setting the bar too low regarding the tests has some worried that the results may not be taken seriously by investors.[37] The government hopes to have the results "made public in some way on May 4," said the official, who requested anonymity because the plans are still in flux.[28] Government officials have been less than clear about how the details of the test results will be released.[45]
On April 24, the government will reveal the economic and financial assumptions involved in the tests, which are meant to determine an institution's ability to withstand a further deterioration in the economic environment. Such criteria would include a rise in the unemployment rate.[27] How in the world can C pass any test, let alone a test that supposes credit conditions worse than in the current economy? The stress test is only one of the huge mistakes the government has made trying to paper over the huge amount of debt that has to be liquidated.[38] The challenge with the stress tests is that the government is already grading on a curve.[19]
Officials from the U.S. Securities and Exchange Commission have been involved in the discussions, because it is still unclear if the stress tests will trigger a disclosure requirement, the sources said on Tuesday.[8] the Stash writes releasing accurate aggregate data from the stress tests may be the best option. Jamie Dimon: sinner? The Big Money points out that "scarlet letters were not pinned on people who hadn't earned them."[19] The stress test could easily become the Housing and Redevelopment Act on steroids, distorting the system in dangerous ways that are not yet apparent.[32] In finance, a stress test used to be a formal way for management to run "what if" scenarios; no CEO was expected to announce if a test revealed the company wasn't strong enough to withstand the worst-case scenario.[47]
Folks, the so called stress test is just another delaying tactic to buy more time. Thats all they are trying to do, buy more time in a desperate attempt to slowly deflate the ballon.[32] The problem is, the stress test is based on "best guesses" of how bad the economy will get, says Michael Heller, president of Veribanc, a bank-rating firm.[15] The stress tests are based around a series of "what-if" projections; if the economy worsens or deteriorates.[38] The actual decline of the real economy thus far is already steeper and deeper than assumed in the Stress Tests.[18]
In medicine, a stress test is when the doctor puts you on a treadmill to check your heart. It's not used on patients who are clearly having a heart attack; it probably would kill them.[47]
With all the above mentioned it seems that the term "stress Test" might not be the best term. It might just be Banking Time Bomb Test.[38] "The downside of it is that you are bleeding capital out of the banking system at a time when the banks would be better off with more, rather than less," notes one banking analyst.[13] TIME's calculations suggest that the government-subsidized buyers would pay only $70, leaving the banks with a $21 loss on each bond sold.[12] Economies of scale for banks are exhausted well before a balance sheet size of $100 bn is achieved.''[18] As outlined in our report, $1.8 trillion are expected to fall on U.S. banks alone.[2] The likelihood of the U.S. Congress voting even a nickel in additional financial support for the banks is zero.[18] If you really want to understand these huge banks, "The Best Way To Rob A Bank Is To Own One" by William K. Black. Most of the bank examiners were not around back in the 80s, so they're being used on wave number two just like the same type of examiners were used in the S&L; fiasco. The control frauds, the financial superpredators, easily enlisted the aid of the top-tier audit firms, top-tier law firms and their politicians to try their best to continue their Ponzi/Madoff schemes. They have no other choice.[38] An obvious mechanism (apart from aggressive anti-trust policy) is to tax bank size.'' One way to do this is through making regulatory capital requirements increasing in the size of the bank's activities.[18] Stronger banks are likely to fare much better at attracting private capital and removing any stigma associated with taxpayer funds.[36]
President Obama may be preparing for that scenario by essentially promising that the government won't let any big banks fail.[26] President Obama is caught between a rock and a hard place when it comes to the bank "stress tests."[44]
I don't expect the British government to bail out the foreign subsidiaries of RBS, Lloyd's Group, Barclays or HSBC.'' I would expect the British government to look seriously at bailing out UK subsidiaries of foreign banks, should these be threatened with insolvency, especially if most of the substantive economic activity of these banks is in the UK.'' [18] I realize the government forced Goldman to partake in TARP, but I recall Goldman actually became a bank holding company, also.[6]
Whatever the results, the administration's conclusions would be seen as a thumbs up or down on individual banks. [32] The danger is that the results reveal that some banks are thriving while others are ailing.[46]
If the news was good, shouldn'''t we have heard already? Isn'''t good news something you want to rush to the press?'' The delay could be a clever explanation as to why the banks didn'''t do well.[33] The public generally has a good idea which banks are better positioned than others.[46] Uncle Sam hasn't said how much information will be released to the public and there's no indication what methodology was used to assess a bank's strength.[32] Mr. Ludwig cautioned that any information could give rise to mischief. "Bank exams are confidential for good reason," he said. "Given the kind of confidential information they contain, there is always the possibility of misuse or misinterpretation."[7] Regarding,"But even if the information weren't tied to individual banks, the smart analyst could easily match the bank to the balance sheet.[32] "There will be definitely be some information that will be provided at the end of it, but exactly what that will be, and when it will be provided, will come forth later," Comptroller of the Currency John Dugan, who supervises some of the nation's largest banks, said last month.[8] Over the last year, the stocks of the largest banks have largely moved up and down in concert with one another. Once Wall St. perceives some of the firms as being significantly troubled, the sell-offs in their stocks will be rapid and damaging.[23] Undoubtedly, banks had set asided loan loss reserves for a large number of loans being refinanced.[38]
Yardeni adds the government could have used the TARP program to buy the entire S&P; 500 sector for $598bn. Think about this: Enron-style off balance sheet vehicles house untold hundreds of billions of dollars in securitizations built on mortgages, auto loans, student loans, credit card receivables, you name it.[4] Keep also in mind that global high-yield defaults are expected to reach 15% by the end of 2009 and that the commercial real estate market has just turned. According to recent press reports, in a report next week the IMF plans to raise its global loan and securities loss estimate to $4 trillion by the end of 2010, including about $3.1 trillion in U.S. originated losses (up from $2.2 trillion estimate as of January) and $900bn in European and Asian originated losses. Compare these numbers with U.S. originated loan and securities losses of $3.6 trillion as estimated by RGE Monitor in a January report.[2]
The U.S. authorities have been able to channel somewhere between $40 bn and $50 bn of U.S. tax payers' money to foreign counterparties of AIG, but that is unlikely to be the new status quo.'' They got away with it, thus far, because the foreign bail-outs by the U.S. tax payer was hidden in obscure, indeed barely comprehensible financial transactions.[18]
FierceFinance is the financial services daily monitor, with news covering the banking industry, asset management, capital markets and SEC regulations.[46] The details will be important, and the Obama Administration has decided to reveal them, according to the New York Times. Until now, officials have only said that they would reveal the amounts of new capital injections.[46] Some Obama administration figures believe a move to identify the individual strengths and weaknesses would lay the groundwork for a new phase in the financial crisis.[41]
Ultimately, the overall optimistic notes "reflect a new phase of the government response to the financial crisis and recession," notes the Post. Now that the government has instituted several programs to prop up the economy, the government wants Americans to feel optimistic enough to open up their wallets. [13] USAT fronts the results of a new poll that shows most Americans are glad government has stepped in to deal with the current economic mess.[13]
Never mind that: as Wessel says, "Treasury has to deal with the world as it is, not as it hoped it would be". That means being extremely transparent about both the tests themselves and their results.[39] As the results of the test get closer to release, the Wall Street rumor mill has churned into overdrive.[37] The obvious risk is that the test results will create a two-tiered banking system -- the haves and the have-nots -- which could wreak more havoc on the stocks of the have-nots.[10] The official, who requested anonymity because the tests are still in process, added that the goal is to ensure that all the results are presented on a comparable basis.[36] Regulators will try to prove the rigor of the tests by releasing a document on April 24 that will explain the underlying assumptions, the official said.[36] Regulators have not made final decisions on how to present the results, the Fed official said.[36]
The document being prepared by regulators will be designed as a guide to interpret the government's industry-wide disclosure, the sources said.[8]
The Administration may have to carve money from other rescue programs being funded from the $US700 billion bail-out.[1] Bank of America may need to raise tens of billions of dollars, too, other analysts note.[4] There's a disconnect herethe anchors dragging down bank balance sheets will continue to sink bank earnings for some time to come.[4] The stress-tests were designed to build confidence that the nation's largest banks could weather a severe and prolonged economic downturn.[41] Ohhh this is a nice site lol. If we use this site then our stress of tests would be cancel because it is a very helpful site. In today'''s economic climate, I'''ve been considering rolling some cash into real estate investments.[34] If the "stress test" models are as eloquent as the investment models that led us into this sinkhole, they might well be committed to the trash bin.[34]
According to experts, the tests remain shrouded in an air of mystery, whilst the markets are used to always having the maximum amount of information available. ''The aim of these tests,'' the New York Times explained, ''is to prevent panic, not to cause it.'' [25] Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics.[35] 'While you can observe differences between companies with unions and companies without unions, there is a huge problem of selection bias: since companies with unions are unlike companies without unions in many ways, you can't say whether any differences in outcomes are due to the effect of the unions themselves, or due to the effect of other factors that would be there regardless of the unions. John DiNardo and David Lee have an elegant way of getting around this problem in a 2004 paper, 'Economic Impacts of New Unionization on Private Sector Employers: 1984-2001.'' Instead of comparing all companies with unions to all companies without unions, they focus on companies where the union certification vote either barely won or barely lost, since these two companies are very similar to each other except for the treatment effect (having collective bargaining rights). This isolates the effect of unionization from other characteristics of the companies in question. They find that unions that barely win an election are successful in obtaining a collective bargaining agreement.[21] Economists believe investors, given some details of the current stress-tests, would have a better way of assessing the financial sector.[41] The law required that investors receive financial and other relevant information about securities offered for sale. It also prohibited misrepresentation and other fraud in the sale of securities.[32]
The U.S. Government Accountability Office (GAO) noted in a report at the end of March that Treasury should require that AIG seek additional concessions from employees and existing derivatives counterparties. [2] First of all depending on the Treasury's commitments, there is only $32 billion, or possibly $135 billion, left of the $700 billion TARP monies.[44] Treasury said it will make new capital available "as a bridge to private capital until market conditions normalize."[26]
Ok, $2 tn is about two-thirds of the tax revenue the federal government collects each year. [4] Probably sharper for the administration to throw it down the memory hole and gamble on the effects of the tests not being seen until after 2010.[20]
SOURCES
1. Stress tests may strain US bail-out
2. Roubini Global Economics: Banks In The Spotlight
3. US Government to reveal details of bank stress tests to reassure investors - Times Online
4. Taking Stock of Bank Stress Tests at Emac's Stock Watch | Fox Business
5. Timothy Geithner'''s stress test - THE WEEK
6. Banks get their grades on May 4 (Dealscape)
7. Banks Await Stress-Test Results - WSJ.com
8. U.S. prepping bank stress test guide: sources | Reuters
9. UPDATE 1-US to release bank stress data in May-White House | Markets | US Markets | Reuters
10. Big-bank'stress test' results to be released May 4 | Money & Company | Los Angeles Times
11. Obama's Dodge by The Editors on National Review Online
12. Banks Balk at Selling Toxic Assets - TIME
13. The administration''will reveal results from stress tests on banks; Obama stays put on agenda. - By Daniel Politi - Slate Magazine
14. POP QUIZ! Bank's stress test grades coming early? (Dealscape)
15. All banks expected to pass stress test; analysts not so sure - USATODAY.com
16. Stress Test Preview: Banks Holding Up | On the Brink | Financial Articles & Investing News | TheStreet.com
17. Stress Test Dud - Fears That Citi Will Come in Dead Last of 19 Banks
18. FT.com | Willem Buiter's Maverecon | Ruminations on banking
19. Evening Reading: Stressing Out Over the Stress Tests - Deal Journal - WSJ
20. Do We Really Want the Results of Those Stress Tests? - The Stash
21. Secondary Sources: The Problem With Stress Tests, Stimulus, Unions - Real Time Economics - WSJ
22. Obama plans to disclose bank stress test results - BloggingStocks
23. Disclosing Bank "Stress Test" Numbers: Good Way To Cause Panic - 24/7 Wall Street
24. AFP: US to make some bank'stress tests' results public
25. AGI News On - USA: AUTHORITIES PREPARE GUIDE TO BANK STRESS TESTS
26. Should bank stress test results be released?
27. Results of Bank Stress Tests To Start Emerging Next Week | NBC Washington
28. The Associated Press: Banks' stress test results expected May 4
29. U.S. to Reveal Some Details of Stress Test - HispanicBusiness.com
30. Bank Stress Test Results To Be Released? | Gather
31. Article - WSJ.com
32. Bank Stress Test: Dont Reveal the Results-Minyanville
33. Watch Out For Bank Stress Tests
34. Time To Cancel The Stress Tests
35. Secondary Sources: 'Bogus' Stress Test Data, Bad Banks, Tobacco Taxes - Real Time Economics - WSJ
36. UPDATE 2-U.S. lays groundwork for bank stress test release | Reuters
37. Four Reasons the Stress Tests On Banks Could Hurt Stocks | NBC Chicago
38. The Banking Time Bomb Test -- Seeking Alpha
39. Stress Tests Under Stress -- Seeking Alpha
40. Stress Test Results Due May 4 - WSJ.com
41. Public to receive stress-test information
42. Secrecy of U.S. bank stress tests strains release rules | Reuters
43. What will you do if you find out that the bank you have been dealing with '''fails''' its federal stress test? - PBN.com - Providence Business News
44. President Obama's dilemma regarding bank stress tests - BloggingStocks
45. U.S. planning bank stress tests | Reuters
46. Stress test details to be made public - FierceFinance
47. Bank Checkup Also Tests Regulators - WSJ.com
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