Gary Shilling on Bloomberg: bank stress test analysis.
According to reports from the New York Times (NYT) here, and the Wall Street Journal (WSJ) here, the Federal Reserve with the backing of the U.S. Treasury, directed at least ten of 19 of the nation’s largest banks to bolster their balance sheet capital ratio levels by $75 Bn while effectively blessing the stability of several others, marking for the first time a bold line between some of the nation’s stronger and weaker banks. As a result of the government’s two-and-a-half-month examination of the U.S.’s 19 largest financial institutions, one firm, Bank of America by itself needed an additional $34 Bn in assets to bolster its balance sheet against a ‘worse case scenario, At least half a dozen — J.P. Morgan Chase & Co., Goldman Sachs Group Inc., MetLife Inc., American Express Co., Bank of New York Mellon Corp. and Capital One Financial Corp were among the passing banks.
Feds to Banks: 'I own You.'
A bank stress test is a commonly occuring examination or audit by regulatory agencies. A ‘stress test‘ demands that banks model the worst-case economic recession, a so-called “stress scenario,” and then calculate if they have sufficient capital reserves to cover possible losses. The government has given the banks six weeks to come up with the additional capital on their own, or they may have to accept additional TARP funds. If that occurs, the government may require additional TARP funds be common equity shares, making the U.S. government the largest shareholder — one way of ‘nationalizing’ banks. Ostensibly, if the banks do well and stock share prices increase in the next 2-3 years, with the U.S. holding common equity, it could be a budget bonanza for the government helping it to pay down the burdgeoning federal deficit. And like the governments tough position with Auto industry executives, the Federal Reserve and the FDIC issued a joint statement that appears to lay the foundation for holding bank CEOs and senior executives accountable.
The NYTs published a very nice listing of the ‘stress test results here. While the WSJ published an excellent interactive graphic of the stress test results here. In addition, the Federal Reserve provided a PDF overview of the ‘Stress Test’ process.
Several investment banks issued remarkably bullish research reports today on banks who did poorly on the Fed stress test. For instance, Raymond James and Morgan Stanley, among others, issued reports on certain banks indicating a tripling of share price from roughly $8 to a target range of $25 per share in the next three years, or so. Smart investors would do well to consult a qualified advisor — other than Kudlow or Cramer — before rushing out to buy any bank stocks.
