The WSJ is reporting that the early results of the stress tests are leading federal regulators to require capital raises by Citi and B of A. Readers of TPC will be shocked to find out that the big banks need more capital (dripping sarcasm of course). We’ve been saying for months that the M2M change, PPIP and Stress Tests were carefully constructed government plans to help the banks raise more capital.
Unfortunately, I think the very worst thing possible has occurred: there appears to be a false dawn in the economy and the banks have been convinced that they might be able to earn their way out of this crisis. Not surprisingly, Citi and B of A are reportedly disputing the reports. I still maintain that today’s environment is little changed from the environment that existed 8 weeks ago when investors thought the world was ending. The economy is still very weak, the banks are still undercapitalized, real estate is still very weak and the credit markets are still severely debilitated.
Futures are taking a hit on the news. Is the government setting up a sacrificial lamb? There is simply no way they can release the results on May 4th without one or two of the 19 banks failing the test. Even though we know this test is a complete sham it will only look that much more ridiculous if they try to say that all 19 banks are healthy when in reality many of them are technically insolvent.
*Thanks to reader Gary for the link to the article.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.