Bank Stress Test
Only one of the 19 financial institutions that received a bank stress test would
require additional capital, the controversial government initiative has reportedly concluded.
The identity of the bank that is alleged to have failed the bank stress test was
The bank-stress-test findings were reported yesterday (Sunday)
by CNBC.com, which said it obtained the information from a source that it did not identify. The source did
not identify the company, CNBC.com reported.
“At least one firm – under the [bank] stress test assumptions – will require more
capital,” the source said.
Bank stress test
The bank-stress-test results were contained in a two-dozen-page report that the
government released Friday. But the results had already been “conveyed” to the firms, meaning the bank in question
is aware of the U.S. central bank’s assessment, according to the published report.
This round of bank stress tests was essentially a two-step process. The first step
– outlining how the banks have been analyzed – was taken care of with the report released over the weekend. The
second step – releasing the results to the public – will be taken care of when the actual results are released May
4, which is one week from today (Monday).
Neither the U.S. Federal Reserve nor the U.S. Treasury Department would
The bank stress tests have a very specific purpose. Financial institutions that
are found to have inadequate capital will have six months to raise the money via the private sector. If that
doesn’t work, the government has said the financial institutions will be eligible for an infusion of capital via
the federal government’s so-called “Capital Access Program.”
U.S. Treasury Secretary Timothy F. Geithner said he would be open to banks
repaying their Troubled Asset Relief Program (TARP) loans, as long as the availability of credit (borrowing) was
not adversely affected. As a Money
Morning special report detailed last week, the credit
markets don’t seem to be loosening up: Lending dropped by more than 20% from October 2008 to February 2009, despite
initiatives to encourage such activity.
According to the conclusion of the report released over the weekend, “most banks
currently have capital levels well in excess of the amounts needed to be well capitalized.”
However, as Money
Morning has reported, the tests have become a “no-win”
situation for the Obama administration.
“There are two things that are terribly
wrong,” William M. Isaac, the Secura Group chairman who served as head of the Federal Deposit Insurance Corp. (FDIC)
from 1981 to 1985, told CNBC.com. The first problem – and a big
one – is the fact that the details were announced at all.
“I can't imagine what Treasury was thinking when it made that move. It has been
causing incredible angst in the markets,” said Isaac. “The second big problem is that the Treasury is directing the
stress testing, apparently with direct involvement of the White House at the highest levels. Bank regulation by law
is supposed to be carried out by the independent banking agencies without any political interference.”
Morning reported Friday – in a Wall Street version of the
old “he said/(s)he said” drama, Bank of
America Corp. (BAC) Chairman and Chief Executive Officer Kenneth Lewis claimed that ex-U.S. Treasury Secretary
Henry M. “Hank” Paulson Jr. and central bank Chairman Ben S. Bernanke threatened to remove him from office if
he backed out of the Merrill Lynch & Co. Inc.
(SQD) merger or (publicly) discussed the mounting
Paulson had previously testified that Lewis must have misinterpreted their
comments, but then seemed to blame Bernanke for the threat (Translation: Paulson tried to throw Bernanke “under the
New York Attorney General Andrew M. Cuomo has been investigating the
activities surrounding the merger to determine why shareholders were kept in the dark about the financial
Shifting to autos, Italy’s Fiat
SpA (OTC ADR FIATY) emerged as a potential major global player as it attempts to forge a partnership with
LLC, and also has interest in
buying General Motors Corp.’s (GM) Opel unit. Meanwhile, GM will be closing 13 production plants over the summer to trim
inventory and seems likely to miss a $1 billion debt payment due June 1 as it too moves closer to bankruptcy
How bad is GM’s plight: GM may close its Pontiac division after 82 years of
operation, The Wall Street
Journal and MarketWatch.com reported over the
While the earnings news of the week found plenty of winners and losers, ultimately
analysts perceived a bit of “cautious optimism.” Bank of
America and Morgan Stanley (MS) failed to live up to the
favorable showings by Wells Fargo & Co.
(WFC) and other financials, though techs
like Texas Instruments Inc.
Inc. (AAPL) and International Business Machines Corp. (IBM),
beat Wall Street expectations, and brought new hope that the downturn was nearing an end.
Unfortunately, Microsoft Corp.
(MSFT) posted the first quarterly revenue decline in its 23-year
history, though investors still cheered its ability to reduce costs during these challenging times for PC
sales. McDonald’s Corp. (MCD), AT&T Inc.
(T), and Ford
Motor Co. (F) were among the diverse group of companies
reporting better-than-expected results, while United Parcel
Service Inc. (UPS), Caterpillar Inc. (CAT),
Airlines Inc. (CAL) issued disappointing numbers.
(AMZN), bucked the negative trend facing many retailers and
posted higher quarterly earnings and revenue.
Additionally, U.S. retailers J.C. Penney Co. Inc. (JCP) and Coach Inc.
(COH) each expressed positive sentiment that sales activity
seems to picking up. Oracle Corp.
(ORCL) snapped up Sun Microsystems Inc.
(JAVA) for $7.4 billion after IBM chose to pass,
and PepsiCo Inc. (PEP) is attempting to purchase two related bottling companies as corporate execs seek
favorable deals in this environment. Such merger-and-acquisition (M&A) transactions often signal boardroom
confidence and also indicate that the “worst” part of a downturn may be over.
Oil prices surged above the $51-a-barrel level late in the week as traders
overlooked the higher inventory levels and instead focused on some favorable signs that the economy may be closing
in on turnaround mode.
With a six-week winning streak on the line, investors offered their best “clutch
hitting” late Friday, pushing all major indexes to higher levels. Early in the week, after investors digested
negative news from the likes of Bank of America and GM, prognosticators said the weekly stock-market winning streak
was all but over. However, some better-than-expected earnings and economic reports brought out the “bulls” for one
final run. The Nasdaq Composite
Index ended the week in positive territory, and the other
equity indexes were virtually flat from last week’s closing levels (with the Dow Jones Industrial Average suffering a
| Dow Jones
| Russell 2000
| Fed Funds
|| 0 bps
| 10yr. Treasury
|| +76 bps
According to the International
Monetary Fund (IMF), the global downturn will be far worse than
previously expected. For 2009, the IMF expects the world economy to contract by 1.3%, its first such decline in
60-years, with over 10 million employees losing their jobs. Unfortunately, its projections for the United States
are even more dire (-2.8% for the year), with domestic financial institutions suffering $2.7 trillion in losses,
almost twice the IMF’s prior estimates from just six months ago.
While much of the economic data of the week confirmed the IMF’s weak projection,
analysts found a few positive signs that the downturn very well may have bottomed out. While both new home sales
and durable goods orders declined in March, the results beat the weaker Street expectations and came in the
aftermath of some (relatively) strong February numbers.
In another promising sign of stability within the housing sector, the median price
of an existing home sold in March actually rose for the second straight month. Still, the record unemployment
filings last week revealed the ongoing difficulties facing job seekers amid these tight labor conditions. Likewise,
leading economic indicators, a predictive report, dropped for the third consecutive month and many economists
expect the recession to last at least until late third quarter.
| April 20
|| Leading Indicators
|| 3rd consecutive monthly
| April 23
|| Initial Jobless Claims
|| Highest level of total claims
|| Existing Home Sales
|| Larger than expected decline in
| April 24
|| Durable Goods Orders
|| Larger than anticipated fall in
|| New Home Sales
|| Drop in sales, but better
than expected res.