Stress Test Mess

By
Real Estate Broker/Owner

Ok, so let me get this straight because I didn't go to a fancy school; the Federal Reserve wants us to believe that 19 of our largest banks need to raise only $74.6 billion in new capital while at the same time Geithner and the Treasury wants us to believe that we need to leverage $100 billion of TARP funds into upwards of $600 billion (or more) in tax-payer guarantees in order to remove toxic assets from the banks balance sheets as part of the PPIP.  Am I missing something?

If the bank problem is only a $74.6 billion dollar problem, then why don't we just use the remaining $100 billion or so in TARP funds to recapitalize the banks and call it a day?  Wouldn't this be a lot easier than putting the tax payer on the hook for an additional $600 billion in toxic asset guarantees?  Oh, that's right, I forgot, we need to get credit moving, right?

Not only does this moderate assessment of our banking system call into question the need for the PPIP, but it also puts the credibility of the Federal Reserve into question should these major banks end up needing more than the estimated $74.6 billion.

Two things that jumped out at me from this report was, first, that Bank of America needs an additional $33.9 billion in capital.  Wasn't CEO Ken Lewis quoted as saying as recently as a few weeks ago that Bank of America was going to repay the TARP in 2009?

And second, Citigroup is estimated to need only $5.5 billion in additional capital.  Hmm, we'll see if this projection holds.

 

 

 

 

 

Comments (6)

John Walters
Frank Rubi Real Estate - Slidell, LA
Licensed in Louisiana

Mark:

I heard a while back it was more like a trillion dollars of bad assets.  I really don't know what to believe.

May 07, 2009 01:39 PM
Mark MacKenzie
Phoenix, AZ

John:  One estimate is projecting $4 trillion in toxic assets by the end of the year.  The point I wanted to illustrate is that you can't have solvent banks as the Fed is claiming while at the same time have a massive toxic asset problem. 

Additionally, as we have seen, the banks have proven that regardless of their financial health, they are only going to extend credit if it is prudent to do so.  There is no guarantee that even if we eliminated the toxic assets, that the credit markets would actually improve, this is a falsehood.

Credit will come back into the economy and the housing market once they have stabilized. 

 

 

May 07, 2009 02:29 PM
Alice Linahan
Voices Empower - Argyle, TX

Mark,

The more I read, the more I believe the smoke and mirrors theory.

May 07, 2009 03:49 PM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Mark - I couldn't agree more.  Personally, I think the stress tests were nothing more than fluff to make consumers feel comfortable.  There is no way in #&!! the Feds were going to let anything scary be released.

May 07, 2009 03:56 PM
Alice Linahan
Voices Empower - Argyle, TX

Mark,

I thought you would be interested in this interview.

 Do not buy into the Prapaganda being pushed!!

http://www.youtube.com/watch?v=knmxTklgpxc&feature=player_embedded

May 07, 2009 04:07 PM
Kevin Robinson
Twin Falls, ID
Fractional Developer

Mark- Supposedly the govt is helping with the "toxic assets". My little investment group is still buying them at light speed, and at a huge discount. I was under the impression that the discount would disappear with the govt intervention.

May 09, 2009 03:15 AM