A: Stress test leaks everywhere. Bank stocks surge on optimism that JPM, GS, AXP, MET, & BK are all in the clear! Companies expected to be directed to raise cash include Citigroup, Wells, and Bank of America. All banks are surging regardless if they passed or are being directed to raise capital. Suggested ways of raising capital include selling off of assets, converting preferred to common thereby boosting TCE, or from the private sector. Keep in mind that converting preferred to common does not add capital to the balance sheet, but does eliminate dividend costs and boosts TCE. Fed regulators are said to focus strongly on TCE as time goes on.
IN THE CLEAR
Bank of NY Mellon
ASKED TO RAISE CAPITAL
Bank of America
Suntrust & Key Bank are rumored to require more funds from a report last week. The leaks are clearly intentional, and delivered to have a soothing effect on the market on the eve of the release of the full report. This is not by accident folks. Bank stocks are reacting very positively. The report tomorrow will detail out the performance of each bank based on 12 loan categories.
After the Broadway show is done and everybody gets a chance to digest the fed's findings, we will start to hear whether or not the job performed is trusted by the street and the analysts. So far there have been calls that the baseline scenario for the tests are meaningless, putting the reality more in line with the adverse scenario of the tests. Then you got Yves Smith at NakedCapitalism raising concern over the capacity to conduct accurate stress tests for two main reasons:
1) not enough regulators or enough time to digest the complexities of our modern banking giants
2) not a clear understanding of the risks involved with positions held on the books of these banking giants
Yves chimes in:
In the early 1990s, when Citi almost went under, it had 160 bank examiners working SOLELY on its commercial real estate portfolio (Citi has a lot of junior debt against buildings that turned out to be see-throughs).I think the days and weeks after the actual report is released, will bring out the criticisms of the data procured - credibility time! I just don't see how everybody will trust the quality of the data. Lets see.
I would welcome reader input (especially from bank examiners and accountants), but it is pretty clear 100 people and a few weeks (or even a few months) is grossly inadequate for a bank the size and complexity of a Citigroup. Citi has operations in over 100 countries. All 100 examiners can do is make queries along narrow lines, and work with the data presented. This scale of operation won't allow for any verification or recasting of data. There isn't remotely enough manpower.
And do you think these examiners are in any position to assess the risks of CDS, CDOs, swaps, foreign exchange exposures, Treasury operations, prime brokerage, to name just a few? I cant imagine US bank examiners have much competence in FX risk (Citi trades in a lot of exotic currencies, too), and that's one of the easier to assess on the list above.