THE STASH MAY 12, 2009
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The Journal has an interesting piece today about how the largely successful U.S. stress tests are prompting Europeans to worry that they haven't scrutinized their own banks closely enough. It's also worth highlighting this aside about how the rising stock market makes the whole stress-test exercise much, much easier:
Unlike in the U.S., there has been no major policy initiative to force banks in Europe to increase capital cushions, and governments have intervened only on a piecemeal basis. Meanwhile, as U.S. banks pile in with efforts to raise capital from investors, European banks aren't taking advantage of a stock rally to do the same.
Obviously raising the $75 billion the government wants the stress-tested banks to raise isn't nearly as hard as raising $200 billion or $500 billion. (Particularly since many of the banks can convert the preferred shares the government owns into common stock if they really have to.) Still, there are certain banks, like Bank of America, Citigroup, GMAC, and Wells Fargo, that have to raise substantial sums of money. And that money would be almost impossible to raise privately if the stock market hadn't rebounded over the last six weeks. (It might still be tough in some cases.)
When we started the stress tests, everyone just assumed the banks that needed more money would have to seek it from the government, since no private investor would want to hand it over to them. We're hardly in the clear yet, but the fact that this prognosis has changed is pretty encouraging.
Update: The Washington Post has a story on the subject today.
--Noam Scheiber
6 comments
"virtuous," eh? A modest proposal: everyone who either advises, or comments, or reports on this massive giveaway to the crony banks should be required to disclose his or her holdings in banks shares-- when they were purchased and disposed, and at what price.
Who's long Government Sachs and $hitigroup? Fess up now, folks.
- teplukhin2you
May 12, 2009 at 1:33pm
i'll go first: my long position in banks is 0. same goes for my short position. (unless i'm invested through some index fund that i'm not aware of, which is possible...)
- Noam Scheiber
May 12, 2009 at 2:13pm
"They performed with great virtuosity..."
This is all sooo good! Apperances are being reestablished, "confidence" is back, next minute everyone will ask for deregulation and a tax decrease for the folks who are really behind the general welfare!
The virtuous banks and their cycles!
Or the banks and their virtuous cycles!
Or the banks and their virtuous 76 billion + 1 trillion + 500 billion - 750 billion (I can't keep up)!
Or the banks and their stock market virtuosity cycle!
Whatever! Anything goes! I'm so relieved
- luispc
May 12, 2009 at 3:23pm
Other views on the integrity of the stress tests:
Paul Krugman:
I won't weigh in on the debate over the quality of the stress tests themselves, except to repeat what many observers have noted: The regulators didn't have the resources to make a really careful assessment of the banks' assets, and in any case they allowed the banks to bargain over what the results would say. A rigorous audit it wasn't.
Robert Kuttman [from Huffington Post]
At one point in his remarks, Bernanke, recounting just how rigorous the stress tests were, explained that "More than 150 examiners, supervisors, and economists" had conducted several weeks of examinations of the banks. That kind of let the cat out of the bag. If you do the arithmetic, that is about seven supervisors per bank, and all of the stress-tested 19 banks were hundred-billion and up outfits. When an ordinary commercial bank, say a $10 billion outfit, undergoes a far less complex routine examination of its commercial loan portfolio, it involves dozens of examiners.
So the stress test was not a set of rigorous examinations at all, but a modeling exercise using the banks' own valuations of their assets. The most serious outside observers think the hole in the banks' balance sheets is much larger than $75 billion or even the Fed's worst-case estimate of $599 billion in losses.
Noam, what do they get right and what do they get wrong?
george walton
- iambiguous
May 12, 2009 at 6:59pm
Same as Noam for me tep. Good question by the way.
- jet
May 12, 2009 at 8:11pm
cross post, sorry: for those whose reading of this non-recovery depends on a reading of the headlines, ponder these Most Read stories in the business pages of today's NYT:
Cargo Ships Treading Water Off Singapore, Waiting for Work
Records Show Billions Withdrawn Before Madoff Arrest
Hospitals Begin to Move Into Supermarkets
On the Road: A Meeting in New York? Can’t We Videoconference?
Russia Stockpiles Diamonds, Awaiting the Return of Demand
Advertising: As Storefronts Become Vacant, Ads Arrive
Hmm. Some 750 container ships sitting idle off Singapore harbor. Russia would rather hoard diamonds than sell them, and DeBeers has cut production IIRC 91%. Business travel has fallen off a cliff. Retail has fallen off a cliff. Autos have fallen-- well, you know the tune. The only companies that are thriving are the likes of Dollar Tree, auto parts retailers, maybe Netflix.
If you still think there's merit to the Geithner-ObamaRahma BS about happy days, corner's turned etc, then ponder that last NYT headline's implications: mall landlords are now earning more from advertising on vacant shopfront windows than from rent.
Never seen that in my life. Then again, I've never seen such cronyism and corruption at high levels in my life-- outside of Russia and Brazil and Mexico, that is.
- teplukhin2you
May 13, 2009 at 9:33am