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What stress tests mean for banks, us

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Kai Ryssdal: Trying to figure out why anything happens on Wall Street can be tricky. But I think we can legitimately divide the discussion today into two equal parts. One part is that some things happen in the markets because of facts. Another is that some things happen because of rumors. Today was a rumor day for Citigroup and Bank of America. Anonymous sources told the Wall Street Journal that the recent government stress test results for the two banks didn’t look so good. The paper says the banks might need billions more in cash to prepare for future losses.

We’ll get the official stress test results next Monday, replacing those rumors with facts. At which point we will, in theory, finally know more about how healthy the banks really are. Marketplace’s Jeremy Hobson reports now from New York.

JEREMY HOBSON: There’s been some confusion about whether banks were able to adjust their earnings in recent weeks to make things look rosier than they actually are. But Mark Zandi, chief economist at Moody’s, says there’s no way to cheat on the stress tests.

MARK ZANDI: No, I don’t think there’s any way that a bank could fudge the results.

Which means things may be worse than first thought. And banks may need more assistance. But Zandi says even if that’s the case, the banking system is much better off than it was before the tests.

ZANDI: This whole process of stress testing is identifying precisely how much capital these institutions need to withstand a very significant economic storm, more significant than what we’ve experienced so far. And if they have enough capital to withstand that, I feel very confident.

So what about the banks that don’t get an A on the stress tests? Karen Petrou is managing director of Federal Financial Analytics.

KAREN PETROU: The two ways to deal with this are to raise capital or shed assets, and I think the banks will try to do both.

If the banks need to raise capital, one way to do that would be this: Convert the government’s aid — currently in the form of preferred shares — into common stock. That means the government would have voting rights at the banks, but the banks wouldn’t have to pay hefty dividends to Uncle Sam. In other words, more risk, less reward for Joe and Judy Taxpayer. But Petrou says that shouldn’t cause concern.

PETROU: The stress tests didn’t make the risks, the stress tests forced recognition of it and for that we should be grateful.

Get your gratitude ready. The stress test results are due out next week.

In New York, I’m Jeremy Hobson for Marketplace.

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