The stress test and America's 3 most stressed banks
Filed under: Economy
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:
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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.
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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.
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Reader Comments (Page 1 of 2)
2-25-2009 @ 8:22AM
Brian said...
If they're to big to fail they are to big..........................
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2-25-2009 @ 9:15AM
Chris said...
When Bear Stearns failed last year, the goverment said it was too big to fail. Paulson and Berneke said it was not good to have such big banks that could take the economy down with them. So why did these two fellows promote making B of A BIGGER marrying them up with countrywide and merrill Lynch, and marrying up J P Morgan, Chase, Wamu, Wells Fargo, Wacovia etc. then take them from investment banks and make them commercial banks for ease in giving them taxpayer money. SHAM
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2-25-2009 @ 9:34AM
gary said...
in my oppinion the banks that are in trouble need new management or they are just wanting a bail out cooking the books.
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2-25-2009 @ 11:02AM
Big Joe said...
If they fail the stress test, what happens next? More taxpayer money. Let the market make the call, and allow them to file for bankruptcy and go out of business. The U.S. taxpayers would spend less on the FDIC $250K insurance liability and our society would have only prudent banks to compete in the market place. The old management teams of these failed financial institutions should have their licenses revoked and be forced to find another line of work, non-management. When do the trials begin to charge these financial managers with incompetence, selfishness and extreme greed. We need a Guantanimo for Financial Managers and governmental oversight managers who created this mess. I'm pissed!!
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2-25-2009 @ 11:03AM
Jack said...
Anyone at BofA that had a hand in the aquisition of either Countrywide or Merrill Lynch should already be "out the door"..(canned, fired, 86'd, whatever)...I am but a lowly BofA customer who CAN read the paper and listen to the news and even I could see that either and/or both of these aquisitions had "train wreck" written all over them. The arrogance and greed of those at the top of the BofA food chain is just beyond belief....almost to the point of being criminal...I have to believe that the honest, hardworking employees are really feeling the pain of a stock price that went from over $42 last year to $4 now.....nice going Ken Lewis and your band of merry "yes" men (and women)...Signed: A Disgusted Customer
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2-25-2009 @ 11:12AM
WALLYHARKINS said...
PER YOUR CHART ABOVE YOU CAN GET $!.271 FOR ONE EURO. YOUR CHART ALSO SAYS YOU CAN GET $96.9 FOR ONE YEN. YOU ARE GREATLY WRONG ABOUT THAT LAST STATEMENT. FIX YOUR CHART!
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2-25-2009 @ 11:27AM
Kim said...
Why are the large banks the ones asking for money, then turning around raising interest rates on credit cards adding fees to carry a balance and anything thing else to screw middle America who is paying to bail them out. I have moved all my money to a credit union-you don't here any of them asking for goverment bail outs.
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2-25-2009 @ 2:27PM
Jay said...
The huge negative reaction to BofA's planned purchase of Countrywide last year left no reaction on their leadership. They compounded the purchase of this loser by buying ML, another sinking ship. Why is the leadership still in control.?...doesn't anybody on the Board have the guts to purge this group. One stupid acquisition can be forgiven....two dumb acquisitions requires immediate remedial action.
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2-25-2009 @ 11:53AM
John said...
I just want to commend (#2 above) Chris, on his comment because my thoughts are the same. Why were these acquions/mergers not evaluated and probed for monopoly
etc., by the designated agency? I guess it was too urgent a matter to be scrutenized. Going forward there are other acquisitions and mergers that are in the works at the moment. I am sure they will be similarly blessed like (B of A, JPM, WFC), because of the urgent need to correct our financial quagmire.
Is there a clause to disallow Merger/acquisition/ consolidation, because such action will qualify the resultant company for TAXPAYER'S Bailout money???
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2-25-2009 @ 11:59AM
j said...
We need to go back and look forward from the days of the Resolution Trust to understand how the financial world corrupted America once again in our history. Lewis would certainly know as his ascendancy with the old Fleet Bank smacks corruption in every fiber of BofA's problems. Unfettered capitalism shows no remorse and has circled their wagons against the threat they fear most, socialism. The past decades of deregulation and hedgefund glory enabled these animals to horde more and more wealth as they sought to strip the middle class of their hard earned equities. The last chapter in a plan so evil that it was traitorous and should be punishable by capital punishment.
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2-25-2009 @ 12:34PM
Peter said...
What about Wells Fargo? The bank that bragged three months ago that it was the only AAA rated bank in the country should now fail its stress test after barely passing regulators' current analysis. Further, what about US Bancorp? Their CEO recently ranted about being forced to take TARP and threatened to give back the $6 billion, but could USB pass its stress test without the $6 billion? And just where is the $6 billion repayment coming from with their current dividend and capital levels? The somber news regarding the largest ten banks and the market reaction is justified!
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2-25-2009 @ 12:27PM
Duke said...
Good Lord. The Fed sure messed this economy up, but so did the SEC. Something flicked the switch from manic to hyperdrive in lending so much money that would never be returned. Putting printed money back into the banks is like giving them monopoly money. Lending monopoly money will not help the economy. This is still a band aid.
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2-25-2009 @ 1:05PM
tinafig1120 said...
Well it's time to hide our money under our mattresses again. If we can't trust the banks, who can we trust?
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2-25-2009 @ 1:25PM
Sam Ganczaruk said...
When the elephants cavort, it's the grass which gets trampled. The past 28 years have seen cavorting elephants (GOP) and us grass people have been really trampled!!!
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2-25-2009 @ 1:34PM
Barb said...
Remember folks, come Dec.31,2009 your bank accounts which are now insured (FDIC) to 250 thou will return back to 100 thou. Watch your money!!!! This 250 thou was put in place for 15 month. As we were hearing in Aug our banks were in trouble our gov changed it to the 250 thou. That was to make us feel more secure and to make sure we did not make a run on our banks to withdraw.
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2-25-2009 @ 1:34PM
Dan said...
If they're to big to fail then they are to big and need to be broken up. To big to fail is a slogan for when it fails the American tax payer bails them out. Smaller corporations and banks are easier to manage and regulate. When they get to big they become to politically powerful, as in fascistic behavior.
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2-25-2009 @ 1:50PM
George said...
Dreams, Hope, Stimulus, etc., etc.!!??
WAMU, now being CHASE charges me 24% interest. I called them twice to lower the rate to a more affordable rate; but they just flatly denied me in no uncertain terms! Billions of bailout for them; but don't give a damn for the consumers. WAMU failed as the largest bank in the US and on top of that the CEO got a nice handshake when he was terminated in the tune of $12-18 million for being 3 weeks on the job! However, Wells Fargo, after talking to them, lowered my interest from 11.9% to 7.9%. This is working with a client.
The stimulus plan is just a "big joke" being played on the American people. It is nice for Mr. Reid from Nevada who got $8 Billion for a high speed train from Las Vegas to California! That is "really" going to help the economy!?
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2-25-2009 @ 1:40PM
Dan said...
Actually you can trust small banks, such as credit unions who have a good track record and no subprime slime that the large, to big to fail, banks have.
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2-25-2009 @ 1:53PM
George said...
Dreams, Hope, Stimulus, etc., etc.!!??
WAMU, now being CHASE charges me 24% interest. I called them twice to lower the rate to a more affordable rate; but they just flatly denied me in no uncertain terms! Billions of bailout for them; but don't give a damn for the consumers. WAMU failed as the largest bank in the USA and on top of that the CEO got a nice handshake when he was terminated in the tune of $12-18 million for being 3 weeks on the job! However, Wells Fargo, after talking to them, lowered my interest from 11.9% to 7.9%. This is working with a client.
The stimulus plan is just a "big joke" being played on the American people. It is nice for Mr. Reid from Nevada who got $8 Billion for a high speed train from Las Vegas to California! That is "really" going to help the economy!? Only for the Big Boys in the government
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2-25-2009 @ 1:59PM
pearl said...
The truth of the matter is our financial system failed(literally) back in Sept. 08. The goverment has kept this secret to avoid global panic. Obviously this has never happened before so nobody knows what to do to fix it. Investment banks have been turned into commercial banks to try and salvage something. Now that they are commercial they can qualify for taxpayer monies. This has been a step by step process of our goverment, while everyone globally gets use to the idea of financial peril.
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