Toro - bank stress tests

What do you think the results will be and how do you feel they will affect the market?

Well, I'm not Toro, but here's some info:

Bank industry to hear results of 'stress tests'

By DANIEL WAGNER – 58 minutes ago

WASHINGTON (AP) — Federal regulators on Friday will privately begin telling the nation's 19 largest financial institutions how well they performed in stress tests to assess their soundness.

Regulators trying to stabilize the financial system also will release the test methodology they used, which could provide clues about which banks may be in trouble — but also could unwittingly roil the industry.

The results of the stress tests won't be publicly released until May 4.

The slow-motion rollout is intended to blunt market reaction to the news of which banks are healthy, which ones could fail if the recession worsens and which need more money to survive.

News reports, including a confidential outline of the tests first reported by The Associated Press this week, have led analysts to start handicapping which banks could fail. The speculation will intensify with Friday's release of the test methodology.

"I'm worried about the overreaction — people selling every bank short and pulling out all their deposits and hiding their money in the mattress," said Scott Talbott, a lobbyist with the Financial Services Roundtable, which represents the biggest financial firms.

Regulators are striving to release enough information about the stress tests to inspire confidence. But they don't want to give analysts so much detail that they can run their own tests on the banks before the official release of results.

The stress tests subject banks' balance sheets to two scenarios. One reflects current forecasts for the recession. The other assumes the recession will worsen, according to the document, produced by the Federal Reserve.

Officials also are examining the quality of banks' loans, according to an industry official and a regulatory official who spoke on condition of anonymity because they weren't authorized to discuss the tests publicly.

The goal is to see if banks have enough money reserved to withstand these losses. If they don't, regulators will force banks to boost their capital, with private or government money, and will take other steps to strengthen their balance sheets.

Some experts fear the hypotheticals aren't tough enough.

"The question is, will the market accept the stress test as a realistic case?" said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co.

Recent economic indicators show the economy is approaching the more severe of the government's two scenarios, Miller said.

Tension surrounding the announcements highlights the high-stakes nature of the stress tests, a centerpiece of the Obama administration's plan for bolstering the financial system. For months, officials have put off questions about the banking system by saying they're awaiting the test results.

The delays have led investors to fret: If the tests show every bank to be strong, they will look like a whitewash and won't be taken seriously.

Yet once investors can distinguish stronger from weaker banks, they could start selling off weaker banks that remain stable but might falter if the recession got much worse.

That's led some experts to question whether public tests were a good idea.
...

A draft report from top regulators said the government may end up acquiring a significant ownership stake in banks, according to an article Friday in The Wall Street Journal. However, the draft report from the Financial Stability Oversight Board says U.S. ownership of individual firms "is not an objective," and that any such occurrence would be temporary, the Journal said.
The Associated Press: Bank industry to hear results of 'stress tests'
 
basically the article is correct. the banks that need more money, the government will probably clean house.
 
What do you think the results will be and how do you feel they will affect the market?

I think they're grading on a sliding scale and the professor is going to give everyone at least a gentleman's C.

Consider the althernative,,,

If they told the truth, they'd be signing a lot of death warrants to a lot of banks.
 
David. Good question which I'm sure is on the minds of many. Here is my analysis.

Banks, via the FDIC rules, already do their own stress tests quarterly. The current mood in Washington is to not trust them. It mystifies me why they all of a sudden have this feeling, but that is another discussion.

Believe the Fed criteria will be more macro and sector-wide systemic-risk oriented. Personally I do not have much confidence in them, but it is what it is. The end questions then are: 1) can we trust the analysis (enough to act upon it); and 2) what is the likely outcome.

Can We Trust the Analysis
Balance sheets of the major banks are a big problem and credit card then commercial real estate assets and liabilities will loom larger the longer the recession lasts (see post on PPIP).

Nothing the current administration is doing today apart from not tampering with what was started by dropping bank lending interest rate to zero back in 2008, is targetting consumer-level recovery (the tax reduction business is a chirmera). the consumber segment of the economy is on auto-pilot even though we hear about lending all the time. The consumer, rightfully, does not want to borrow so he is paying down debt to the best of his ability. This is important because the perspective of the Fed appears to be that expanding bank lending will save everything. Among other things budget-economic coming out of Washington right now, this is unsettling because it is wrong-headed. If you want to discuss this aspect, let me know.

There is a great deal of on-going obfuscation aimed at keeping the public sedated. If the public knew the full extent of what goes on and has been going on for decades in banking, and between both parties and the financial sector, there would be serious outrage or worse. They appear to understand this at least.

My view is that anything coming out of the stress test will be to geared toward manipulating a viewpoint to support a future action(s).

What is the Likely Outcome
C is in big trouble. BAC is better managed, and things improve with the others. Believe C will be broken up and sold off to the other banks. As Harvey Keitel said in a Nicolas Cage movie, "somebody has to go to jail". Perhaps some regional banks will share the same fate.

Am guessing that Ken Lewis of BAC will be ousted and other actions may follow. Right now as I understand it, the report will be coming out 4/5 May. If the large bank stocks pull back hard off the news (will likely not happen at first), especially if a 'W' bottom in the broader market occurs, they will present a good buy and hold opportunity. Trading the waves around this time, will be very tricky.
 
if the treasury come out with softball results the market will simply not believe them. i dont know whether or not it will lead to a massive selloff or not. i agree with indiana citi is in major trouble and probably will be taken over by the fdic or the treasury and i do believe ken lewis will be fired by the 1st week of may if not the 2nd.
 
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I have no idea what the results are going to say.

If they are bad, then the market goes down. If they are good, the market probably goes up. We're up a long way in a short time, so I think the odds of a move down are better than the odds of a move up.
 
don't you think, though, that if there is a truly honest assessment done, that some banks are going to be in trouble (bank of america?)?

Possibly. I'd be surprised if they said no one was in trouble. If they did, no one would believe them. But I also don't think they are going to design a test that fails everyone.
 
don't you think, though, that if there is a truly honest assessment done, that some banks are going to be in trouble (bank of america?)?

Possibly. I'd be surprised if they said no one was in trouble. If they did, no one would believe them. But I also don't think they are going to design a test that fails everyone.

I agree... in fact, i don't think it would be good for us if they did design a test that failed everyone.

but they are going to start shaking things up, i think.

i also suspect that somewhere down the road, when things settle and the economy is on firmer footing, they are going to start breaking down these institutions into smaller, more manageable units.

because i don't think they're going to let anyone be "too big to fail" after this.

but i'm not the financial person. and i always enjoy reading your pov because i learn from you.

so i'm interested in knowing if you foresee something like that, too,
 
The big banks do indeed have asset problems. See my post on PPIP. It is not clear right now, to me at least, how they are going to offset the valuation deficit, and credit card and commerical real estate issues are yet to come.

You can observe the o/a market's current assessment watching what happens to WFC for example vs C. But like most people, the whole banking situation looks very unpredictable at this point. That said, if there is a good pullback on BAC I am going back in.
 

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