Friday, May 8, 2009

Stress Tests a Mess of Jest?

When you gain some weight, your doctor probably yells at you. When you don't listen to his advice and continue your march towards obesity, he'll likely recommend a stress test in order to ascertain the health of your heart. We've all seen this in the form of the shirtless fat guy running on a treadmill with anodes stuck all over his corpulence (as pictured above).

Similarly, banks have become obese (with bloated books of bad debt rather than donuts and ice cream) and have recently undergone a stress test of their own. Back at the end of February President Obama ordered the 19 biggest banks to undergo a stress test to see how they would fare if the economy was to worsen further.

According to the new Treasury Department guidelines, the banks would have to assume that the economy contracts by 3.3 percent this year and remains almost flat in 2010. They would also have to assume that housing prices fall another 22 percent this year and that unemployment would shoot to 8.9 percent this year and hit 10.3 percent in 2010.

Yet, despite leaked reports that between 10-14 of the 19 banks would fail and be required to raise more capital, their stocks have been surging recently. For example, three regional banks widely believed to need more funding -- Birmingham, Ala.-based Regions Financial (RF, Fortune 500), Cincinnati's Fifth Third Bank (FITB, Fortune 500) and SunTrust Financial (STI, Fortune 500) of Atlanta -- each gained more than 25% earlier in the week. And Wells Fargo (WFC, Fortune 500), considered one of the strongest, also shot up nearly 25% earlier this week -- despite reports that it too may need to raise more capital.

Just yesterday, hours before the scheduled 5pm release of the results, Citgroup and Bank of America stocks rallied further.

Unfortunately, the stock market is exactly that....a market. It is not the underlying companies it represents, it cannot erase the bad bets the banks themselves have made, and their value is only worth what the next guy is willing to pay for it...ya know, kinda like real estate.

As was estimated, 10 banks are going to need to raise more capital. Will you be the first, or second person in line to sell off your bank stock earlier than everybody else this morning?

1 comment:

Anonymous said...

The longer the feds allow the banks to keep bad loans on their books, the longer the commercial real estate market is going to stagnate. Without pressure to sell, the pervasive bid/offer spread will continue to keep transaction volume low.

If you are an owner, why would you voluntarily sell into this market? If you are a buyer, why would you pay up?

The banks have to write down the loans, foreclose, and auction the assets. It's the only way to get the commercial real estate market moving again.