Wall St spin grows over stress test results

Even the Financial Times fell for the spin in this article, when they let go unchallenged the following statement by a “senior banker” (Jamie, don’t be bashful):

“The government is torn,” said a senior banker. “They have an unpalatable choice between declaring that the banking system is uniformly healthy, which would cause laughter in the market, and saying that some banks need further capital injections, which at this stage can only come from Uncle Sam.”

What’s wrong with this statement?  The way corporate capitalism works is like this:

The government doesn’t recapitalize anyone until all private party claimants have been wiped out, or in the case of preferred or common equity, wiped out and debt converted to equity.  And let the bad banks fail, and their business go to banks that are not “too big to fail.” [corrected 4/20]

Scream your head off to your elected representatives if those pirates Summers and Geithner try to take any more of your and your children’s money with more taxpayer bailout!

Via:  Financial Times

Wall St fears grow over stress test results

By Francesco Guerrera and Edward Luce

Published: April 17 2009 22:00 | Last updated: April 17 2009 22:00

With less than three weeks to go before Washington releases the results of its “stress tests” of the nation’s 19 largest banks, most of Wall Street appears to be in need of Prozac.

Rising panic over how the results will be released has raised fears the results could lead to another collapse of confidence in the battered financial sector. Among other concerns, there is uncertainty over how the federal government will release the results, whether it will publish one aggregate number, or a bank-by-bank breakdown.

In addition, there are concerns as to whether Washington will have the capital to plug any hole it reveals. Wall Street executives believe that some banks will almost certainly require a capital injection, even though Washington is thought unlikely to brand any bank as “failed”.

Although the rules would give banks six months to raise capital from the market before turning to Washington, few believe troubled institutions will have that much time. As one banker said this week: “Once it is known that an institution needs money following the stress tests, they will have about six minutes, rather than six months, to raise the money.”

Banking stocks have performed well in recent weeks as good first-quarter results and some positive signs on the economic front allayed investors’ worst fears over the future of the industry.

However, executives fear that the release of the stress test results, scheduled for early May, could make it apparent the US banking system is split between a small group of relatively healthy companies, such as Goldman Sachs and JPMorgan Chase, and a large cohort of weaker ones.

In addition, if the stress tests force the government to inject capital into ailing institutions such as Citigroup and Bank of America, the move could spook investors and reawaken worries over the nationalisation of some of the nation’s largest banks.

“The government is torn,” said a senior banker. “They have an unpalatable choice between declaring that the banking system is uniformly healthy, which would cause laughter in the market, and saying that some banks need further capital injections, which at this stage can only come from Uncle Sam.”

Bankers who have been involved in the stress tests say the authorities are leaning towards publishing fairly detailed results in early May, possibly as early as May 4. In addition, the Fed plans to release a “white paper” next week setting out the methodology behind the tests.

However, bankers say that over the next fortnight the Federal Reserve, which is carrying out the tests, is likely to tell the banks of its conclusions and give them time to respond – a process that could lead to further adjustments to the actions to be taken as a result of the tests. It could also intensify lobbying by the banks for differential treatment.

The picture is complicated by pressure that stronger institutions, such as Goldman Sachs and JPMorgan, are applying to the Treasury to permit them to repay the troubled asset relief funds they received from the government – not least to escape the conditions Congress has attached to them.

The Treasury appears to be split about the best way forward with some arguing for early repayment, which would showcase the success of the programme, and others arguing it would risk an embarrassment down the line if the economy deteriorated and the banks had to return for further assistance.

In addition, by repaying early, the banks would have escaped the strings imposed by Congress on Tarp recipients, while still benefiting from other government assistance, including debt guarantees. “These are legitimate concerns,” said Douglas Elliott of the Brookings Institution. “One way round them would be to get Goldman Sachs and JPMorgan to agree to continue to adhere to the conditions that apply to Tarp recipients.”