With Treasury imposing so-called stress tests on America's top 20 banks, there is no doubt in my mind that short sellers have long ago pounced on their shares and will profit from their decline. What is the stress test? How will Treasury decide who will pass and who will fail? Which banks are likely to fail? And what will happen to those banks?

The stress test has yet to be defined precisely. In general, it will help regulators estimate what will happen to banks' capital if general economic conditions deteriorate further. For those banks which appear unlikely to survive the stress test with their current capital, the government will urge them to raise private capital. And if they can't do that, the government will decide how much and what form its additional capital injections might take.

It doesn't take a genius to figure out which three banks are most likely to fail that test (which is a good thing because I am not one). The stock market is already giving you the answer -- just look at the banks with the lowest stock prices that have taken TARP money. This leads you to these three banks:

  • Citigroup (NYSE: C) is at $2.17 and is in talks to convert $45 billion in preferred stock into a 40% stake in its common -- and that's before the stress test.
  • Bank of America (NYSE: BAC) is at $3.99 and is taking a beating in the stock market thanks to its bets on damaged goods -- Merrill Lynch and Countrywide.
  • Fifth Third (NASDAQ: FITB) is at $1.26, losing $2 billion in 2008; it received $3.4 billion in TARP and is considered uninvestable until after its stress test.

The first two are probably going to be considered too big to fail. But I am less sure that the same can be said for the last one. Do you have other candidates?

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares and has no financial interest in the other securities mentioned.


Increase your money and finance knowledge from home

Socially Responsible Investing

Invest in companies with a conscience.

View Course »

Investor’s Toolbox

Improve your investing savvy with the right financial toolset.

View Course »

Add a Comment

*0 / 3000 Character Maximum