Fallout: The Financial Crisis

Weekly Wrap: Banks’ stress test results

Marketplace Staff May 8, 2009
Fallout: The Financial Crisis

Weekly Wrap: Banks’ stress test results

Marketplace Staff May 8, 2009


Kai Ryssdal: This was a week that had banks written all over it. Every day there was another leak about the Treasury Department’s stress tests. This bank is going to need so many billion dollars more. This one won’t. And yet, when all was said and done yesterday and the official results were announced, the reaction really was kind of a yawner. No market crisis. No imminent talk of banks going under. So that’s where we’re going to start our weekly wrap of Wall Street and beyond. We’ve got John Carney from Clusterstock.com with us. And Heidi Moore of the Wall Street Journal. Hello again, guys.

Heidi Moore: Hi, Kai.

John Carney: Glad to be here.

Ryssdal:I want to talk about those stress tests, because you know, we haven’t all talked about them enough. And Heidi, lets start with you. And my thesis is this: That maybe all the naysayers and all the ‘oh, these things are never going to work and it’s just a waste of time,’ that was all wrong and maybe we actually got something constructive and positive out of this?

Moore: Well, if we did, you’ll have to tell the banks because they’re in denial. So they are grumbling about everything that’s happened with the stress tests. I mean, you’ll see sort of like little areas of conscientious objection. I mean, Morgan Stanley put out a release today. They raised money to help meet their capital requirements and they said that they were raising money because they were doing a joint venture with Smith Barney and it was consistent with their long-term capital plan. So we’re supposed to believe that this whole stress test thing is just a huge coincidence.

Ryssdal: But wait a second, because there were predictions of like armageddon here, right? That we would find out how bad these banks really were? And that didn’t happen.

Moore: Right, but that doesn’t mean that that’s the truth. Because a lot of people actually feel that the banks got off very easy.

Ryssdal: John, what do you think?

Carney: I think that’s exactly right. The public statements coming out of the banks that they think the stress tests were too aggressive, that they don’t think their loses will be anywhere near as high as the government is estimated, completely conflicts with what you’ll hear privately from bankers who have been referring to this as the “feather test,” rather than the stress test. In other words, that it barely weighed on them at all and really didn’t look at what the realistic losses levels will be.

Ryssdal: Does this mean, Heidi, that the bankers believe in some way that they’ve gotten away with something?

Moore: I think the best way to understand what happens between the banks in Washington is sort of Kabuki theater, right. So everyone knows their roles and they just sort of go through the motions of, you know, objection and resistance and cooperation as necessary throughout the election cycles. So I think that, you know, they’re just kind of going through the motions so as not to anger Washington anymore.

Ryssdal: John, let me ask you about that cooperation with Washington. There were, all of last week and in the period of time leading up to the results, really serious leaks of this information. We had, you know, almost down to the tens of millions of dollars, how much money these banks were going to have to raise. If this had been a private company, you know, the CEO would be in jail. Was it a good thing that these leaks happened, and if not, why not?

Carney: I think from a PR perspective it was a good thing. It prepared the market for exactly what was happening. I think, though, from a fundamental point of can investors trust what’s happening in the markets, it was a terrible thing. If you’re an ordinary investor, you didn’t stand a chance. And the troubling thing is, it seems to me that this was done with government sanction.

Ryssdal: Heidi, what’s next with the banks, then? Once we put this whole stress test thing behind us, and Wells Fargo, as it did today, goes out and raises another however many billions of dollars and satisfies the capital requirements, what’s the next big thing to look for?

Moore: Well, what we have is what everyone was afraid of, right, which is that there is now a clear delineations
between the banks that are going to be successful and that banks that are going to have to wrestle with TARP and with government interference. So you have Goldman Sachs and JP Morgan as your new banking overlords basically. They don’t have to raise money. They’re free to pursue their business models. And they’re going to be more competitive and use their competitive spirit as a way to take business from the other banks. Meanwhile you have the other banks, and they look like the slow kids.

Ryssdal: Real quickly, John, let me get your take on this morning’s unemployment numbers. Is this a case of it’s getting less bad? Or is it a case of we’re still doomed?

Carney: It’s getting bad more slowly, which is a good thing. It was good news to see the unemployment numbers today not keep accelerating at the level they were.

Ryssdal: Heidi, the jobs report? Good, bad, or somewhere in the middle?

Moore: I think it’s great. I mean, if you talk to business leaders, you’re finally hearing some optimism from them. They’re talking about a real recover. You’re seeing the capital markets open again. I mean, at least there’s some optimism in the air, rather than the just sort of exhaustion and adrenaline that was fueling the past two and a half years.

Ryssdal: Heidi Moore at the Wall Street Journal. John Carney from Clusterstock.com. Thanks guys.

Moore: Thank you.

Carney: Thank you.

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