• 844 days Will The ECB Continue To Hike Rates?
  • 844 days Forbes: Aramco Remains Largest Company In The Middle East
  • 846 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 1,246 days Could Crypto Overtake Traditional Investment?
  • 1,250 days Americans Still Quitting Jobs At Record Pace
  • 1,252 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 1,255 days Is The Dollar Too Strong?
  • 1,256 days Big Tech Disappoints Investors on Earnings Calls
  • 1,257 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 1,258 days China Is Quietly Trying To Distance Itself From Russia
  • 1,259 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 1,263 days Crypto Investors Won Big In 2021
  • 1,263 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 1,264 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 1,266 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 1,266 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 1,270 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 1,270 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 1,271 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 1,273 days Are NFTs About To Take Over Gaming?
What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

  1. Home
  2. Markets
  3. Other

Bank Stress Tests Much Ado about Nothing

In late breaking news, the U.S. Dollar is trading weaker against all major currencies after the Fed's bank stress test results showed none of the 19 U.S. banks being examined is facing insolvency.

If anything was revealed, it was that more than a few of the biggest banks need to raise more capital to meet the Fed's requirements. This can only be accomplished three ways: by selling assets, converting preferred shares to common stock or asking the government for more money.

From an investor's standpoint there is relief that this stressful (no pun intended) period of economic history is over. This may mean that trader appetite for risk is likely to increase as the worst of the banking crisis may be behind us.

Now that the world knows the financial condition of the U.S. banking system, the U.S. Dollar could get trashed as traders seek higher returns elsewhere. Remember all the money that flowed into the Dollar for safety reasons? Well you can pretty much kiss it good-bye.

The question that should be raised is what was accomplished by this whole process? In my opinion it was all done to prop up the value of bank stocks because the Fed was running out of TARP money. Way back in February when the stock market was falling apart because of the lack of confidence in Treasury Secretary Geithner and some bank stocks were headed toward zero, the government had to do something so they announced the stress test program.

Basically it was saying to investors, "You have nothing to worry about until you see the actual numbers. So lay off the bank stocks." Speculative traders naturally began buying the cheapest stocks like Bank of America and Citigroup. Lo and behold it turns out that these are two of the stocks that need capital. I guess the market did get it right by driving their stock prices so low.

If financial stocks did not rally then these stocks would have needed even more capital. Furthermore, we were led to believe that the bank capitalization problem was a major problem. If this is the case then why are we giving the undercapitalized banks until June 9th to come up with a plan to raise capital and until November 8th to actually raise the money? My guess is that the regulators believe that by instilling confidence back in the banking system that investors will drive the bank stocks so high that they may not even need to raise capital by November.

There is only about a $100 billion of TARP money left, but believe it or not the 19 major banks are undercapitalized by only $75 billion. How convenient. What we have really discovered is that if the stock market does not continue to rally and boost the price of bank stocks then the problems of the past could repeat themselves in the future.

 

Back to homepage

Leave a comment

Leave a comment