Marketplace Scratch Pad

Morning reading

Paddy Hirsch May 4, 2009

Still stressing about those tests.

The debate over the stress tests continues. We’re due to hear some of the results this week although how much information we’ll get remains uncertain. Over at the New York Times, David Leonhart says the tests may bring hope more than fear.

The administration is expected to make the case that the needs of the troubled banks can be met with the bailout funds that Congress has already approved.

“None of these banks are insolvent,” said a senior government official, who did not want to be identified before the public release of the test results.
The official added: “These are manageable losses.”

Leonhart says the stress tests could be a turning point in the crisis we’ve been suffering through for so many months now. If the tests fail to instill confidence, he says, it will be the clearest sign to date that economists who have criticized the administration may be right that its rescue plan has not been aggressive enough.

Warren Buffett’s not an economist, but he’s no fan of these stress tests. The Financial Times was at the Berkshire Hathaway stockholders conference this weekend, and reported Buffett saying the high-profile losses at Citigroup had distorted perceptions of smaller banks with different business models.

Mr Buffet added he was not sure how he would have handled the disclosure of the stress test results, due later this week, but that any disclosure method would probably confuse people.
He did argue that stress tests were not necessary for 15 of the 19 banks being evaluated because they were not too big to fail and did not pose that kind of risk. He said that all but four of the banks being tested could easily be sold with the assistance of the Federal Deposit Insurance Corporation.
He said that Wells Fargo, US Bancorp and M&T Bank, which Berkshire holds stakes in, do not need additional capital. Mr Buffett said US banks were safe because they were fully backed by the government and the FDIC was capable of handling anything but the biggest bank failures.

Meanwhile, the FT reports Citigroup and Bank of America are working on plans to raise more than $10 billion each in fresh capital, even as they launch last-ditch attempts to convince the US government they do not need to bolster their balance sheets. Citi is already working out how much of its preferred stock it’s going to have to convert to common equity, but Bloomberg reports the bank may try to wring capital from private investors, too.

One likely solution for the company would be to convert $10 billion of privately held securities that could easily be added to the pending exchange, said Kevin Starke, who analyzes bank capital structures for hedge-fund clients of CRT Capital Group LLC.
“That would bring in another $10 billion of common equity, which could be enough to bring Citi over the threshold” required by regulators, said Starke, whose Stamford, Connecticut-based firm specializes in evaluating multiple classes of a company’s securities.

In other news, the NY Times has a great story about tracking the movement of swine flu through the US … on dollar bills.

Where’s George? was started more than 10 years ago by Hank Eskin, a programmer who marked each dollar bill he received with a note asking its next owner to enter its serial number and a ZIP code into the Web site, just for the fun of seeing how far and fast bills traveled. By 2006, the site had the histories of 100 million bills.

By tracking the bills, Northwestern University researchers foresee only 2000 cases by the end of this month, nationwide.

Negotiations continue past the deadline between the NY Times and the Boston Globe. The Globe, New England’s largest newspaper, could be shut down without major concessions. reports one of the concessions involves so-called “lifetime jobs”…470 employees at the Globe have them.

The Guild represents more than 600 editorial, advertising, and business office workers; the Boston Newspaper Printing Pressmen’s Union Local 3 represents about 90 press operators. The Times Co. is seeking $10 million from the Guild and $2.2 million from the pressmen.

And I mentioned this last week, but it’s getting real traction now. Having dined on Chrysler, Fiat is looking at a majority stake in GM’s German unit Opel for pudding. The WSJ reports Fiat CEO Sergio Marchionne meets senior German government officials in Berlin today.

Fiat’s board of directors met Sunday and authorized Mr. Marchionne to seek a potential merger between Fiat and GM’s European operations, including Opel and its U.K. unit Vauxhall, according to a statement issued by Fiat on Sunday. If a deal is reached, Fiat will consider creating a new publicly traded company that combines the auto maker’s car unit, Fiat Group Automobiles, with GM’s European operations, the statement said. The three-way alliance is expected to generate €80 billion ($105.84 billion) in revenue a year.

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