By now we all know that bank earnings are going to be “better than expected” and that “better than expected” is actually the result of creative accounting changes, early Christmas presents from the AIG trading desk and an upward sloping yield curve environment in which a blind monkey could make money. What we don’t know is why the Treasury is delaying their results of the stress tests if the banks are all “going to pass”. My guess: the banks will try to raise capital in the coming weeks. This way the banks can attempt to recapitalize without treasuries help, but based on the independent “strength” of their balance sheets. Surely Wells Fargo can find a few suckers to sell equity to now that everything in the world of banking has been fixed….My translation: treasury is worried they won’t be able to get the toxic assets off the bank balance sheets based on preliminary supply/demand results of the PPIP and that means the banks will need to raise capital from the public (since the taxpayer is almost guaranteed not to fork anymore over via Congress). This is just a hunch, but it’s the most logical one I can think of. Treasury knows a lot of the banks are technically insolvent once they mark their books properly and they’re terrified of the fact that they might not be able to recapitalize them before the credit card, CRE and Alt-A tidal waves hit in the coming 12 months. As Meredith Whitney said, this is turning into “the biggest head fake of all time.”
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.