Fallout: The Financial Crisis

Analyzing the banks’ stress test results

Amy Scott May 7, 2009
Fallout: The Financial Crisis

Analyzing the banks’ stress test results

Amy Scott May 7, 2009


Tess Vigeland: And all in all it wasn’t a too stressful one, was it? At least for a day billed as either heaven or armageddon for the nation’s top banks. The results of those vaunted stress tests are now officially public. Emphasis on “official” since they’ve been leaking out all week. Our New York bureau chief Amy Scott is here with us to sort out the details. Hi Amy!


Vigeland: So did we learn anything today that we didn’t already know?

SCOTT: Well, mostly officials confirmed what’s been trickling out all week. And that is that many of the big banks need a larger cushion to protect against a worsening economy. And that means ten of the 19 banks that were tested were told they need to raise capital. As had been reported, Bank of America has an almost $34 billion gap according to examiners. Citigroup needs $5.5 billion. SunTrust was told to raise a little over $2 billion.

But several banks passed the test without needing to raise money. Those are Goldman Sachs, JPMorgan Chase, U.S. Bankcorp, and a handful of others.

Vigeland: All Right. Well, it seems like the market reaction so far has been pretty positive. Are the banks truly better off than we thought?

SCOTT: Some people I’ve been talking to say yes, that even though some banks do need to raise more money the amount of money is doable. And they feel like with these results out officially we can finally move on.

But there are some skeptics out there. Chris Whalen is one of them. He’s with Institutional Risk Analytics. And his research firm does its own stress tests on the banks. And its latest report is out today, and paints a much more grim picture for the big banks. Whalen told me that the money these banks are being told to raise is a temporary fix.

CHRIS WHALEN: This is basically enough money to get some of these banks to the end of the year. The Summers-Geithner world view is that if they buy time, the economy will get better, and unfortunately that is not the case.

Vigeland: And there he’s referring to Larry Summers, President Obama’s chief economic adviser, and of course, the Treasury Secretary Tim Geithner.

SCOTT: That’s right. Whalen is expecting losses at the banks to get worse, even after the economy starts to recover. But in a briefing today Treasury and Fed officials aggressively defended their methods and said these capital requirements do take into account more losses in the next couple of years. In fact, if things get a lot worse they’re projecting another $600 billion in losses this year and next. And a lot of that is from residential and consumer loans. But Whalen and some others expect those losses to be closer to $1 trillion.

Vigeland: Wow. Well Amy, you know, now there’s the question of how the banks are going to raise all this money that supposedly they’re going to have to get. You know, $34 billion for Bank of America, that’s nothing to sneeze at. Are we looking at more TARP bailout money?

SCOTT: Well potentially. I mean there are a few ways that they can do this. And officials talked about this today. They can ask for more bailout money, which is not a popular idea given that banks are right now trying to figure out how to give it back.

Vigeland: Right.

SCOTT: They can raise money by selling shares. And some of the healthier banks may be able to do this. But it’s, of course, not going to be that easy for the more troubled banks. They might convert the government’s existing preferred shares to common stock, which could be riskier for taxpayers. And officials say that although the banks would obviously prefer to raise the money privately, the government is there to provide a backstop. But they also stressed again today that they don’t expect to have to ask Congress for more bailout money.

Vigeland: All right Amy, I want to get your reaction
to a brief quote about the stress tests from earlier this week. Here’s what they said about the banks: “It’s not about fixing, it’s about making it look like we fixed it, then the people will put their money back in, and that will fix it.” Now admittedly, this was from John Stewart’s Daily Show, but is it that far off the mark?

SCOTT: Well I think a lot of people would say there’s something to that. There’s definitely a PR element to all of this, and now we just have to see if it works.

Vigeland: All right, thanks Amy.

SCOTT: Thank you, Tess.

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