US Treasury Stressed Over Stress-Tests?

Highlights include Bank of America Corp. (BAC), Goldman Sachs Group, Inc. (GS), JPMorgan Chase & Co. (JPM), Citigroup inc. (C) and Wells Fargo & Co. (WFC).

It had been reported by the Reuters that the Treasury Department is planning to delay the release of bank “stress-test” results until after the first-quarter earnings season to “avoid complicating stock market reaction.”

The regulators are currently conducting the tests on 19 large banks with assets greater than $100 billion - including Bank of America (BAC), Goldman Sachs (GS), JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC) etc. - which represent roughly two-thirds of aggregate U.S. banks assets. The capital assessments are being carried out, under two defined economic scenarios over a two-year time horizon (2009-2010), a baseline scenario and a more adverse scenario. We think that the “worst case scenario” used in the stress test is not “worst” enough, and thus the projected capital requirements may rather be understated.

The tests have been going on for some time and may now be in the final phase of reconciling the regulators’ assessments with the banks’ internal assessments.

It was already clarified by the Treasury that the result of the test will not be “pass” or “fail” but rather, “How much capital does this bank need in order to meet the credit needs of its borrowers?” It now appears that Treasury may not disclose institution-specific results, but only as a summary.

The Treasury would certainly want to avoid any nervousness in the markets. Any specific information on a bank which is found in need of a lot of capital may not only result in potential investors avoiding that particular bank, but may also case a run on the bank.

We suspect the banks that are found in need of large capital will find it difficult to raise private capital, and ultimately they will have to be bailed out by the government. However, the Treasury has only about $130 billion remaining in TARP funds, and now if the program is expanded to bailout the insurers, the Treasury may not have enough funds to recapitalize the banks.

As such, the Treasury may have to soon approach the Congress for more bailout money. But it may not be easy for the Treasury to get more funds from the Congress — if they do not provide the details of the results and the capital needs.

In all, it appears that the Treasury must be pretty stressed out over the “stress tests.”

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Comment by DWalla

2009-04-09 12:19:08

Shouldn’t it read:

“As such, the Treasury may have to soon approach the FEDERAL RESERVE for more bailout money. But it may not be easy for the Treasury to get more funds from the FEDERAL RESERVE — if they do not provide the details of the results and the capital needs.”

Since Congress doesn’t have money, and the Federal Reserve is a private corporation to which the US is essentially enslaved?

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