The feds are ducking the news cycle today, waiting until 5 pm to release the results of the celebrated and feared "stress tests". The basic information has already leaked, probably deliberately. The stress tests have been discredited in several quarters as not being much stress and relying on the banks' cooked books[1]. Nevertheless the government will tell at least ten banks, including Wells Fargo, Bank of America and Citigroup that they need more capital. It strenuously maintains that all the banks examined are solvent. How it can do that with a straight face takes practice, creative accounting and deep pockets. The enormous fact of nominal billions in worthless derivative securities on their books is the 800 pound gorilla in the room[1]. The biggest banks like Citi and B of A will be allowed to exchange government owned preferred shares traded for cash earlier in the TARP program for common stock. This move increases their capital account at the expense of taxpayers and existing shareholders. The government looses its preferred creditor status, significant dividends, and increases the risk of no return on its equity investment. Banks will be told to submit plans forget for new capital structures within thirty days. As part of the plan banks are expected to "review their existing management and Board in order to assure that the leadership of the firm has sufficient expertise and ability to manage the risks presented by the current economic environment". The stock market is up, and for Geithner & Co that is half the bubble re-inflated. [1] B of A reported operating profits of $4.25 billion for the first quarter. $2.2 billion of that came from accounting adjustments of Merrill Lynch notes. $1.9billion was from a pre-tax gain on the sale of shares of China Construction Bank. [Fox Business]
[2] Nonperforming loans at the big banks are skyrocketing. Bank of America Corp. bad assets increased 229 percent to $25.7 billion. Problem assets at New York-based Citigroup Inc. rose 128 percent to $27.4 billion, and San Francisco-based Wells Fargo & Co.’s jumped 180 percent to $12.6 billion. [Bloomberg] The right-wing has tried to blame minority and poor home buyers for the disaster, but a study by Center for Public Integrity shows that Wall Street was pumping millions into sub prime lending in order to meet the demand for high yield bonds backed by mortgages. Of the 25 top loan originators, 21 were financed by banks receiving federal aid. In December of 2006 alone, Citigroup packaged $492 million worth of mortgages to sell to as securitized investments. 63% of the loans were originated by New Century which according to a bankruptcy trustee report had "a brazen obsession with increasing loan originations, without due regard to the risks associated". Who are you going to blame the suckers or the cons?