Government Moves Toward Releasing Detailed Stress Test Results

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Shares in some large banks are about to plunge. Reuters reports that “U.S. officials are leaning towards announcing the `stress test’ results of individual banks next week instead of just summary results.” That is likely to cause an exodus from the stocks of the firms that do badly, which may be to the government’s advantage.

The banks with the most troubled balance sheets are playing a game of cat and mouse with the federal government. They continue to debate the accuracy of the stress test conclusions, but the clock has run out. The information that the government has gathered is about to be made public.

Without saying so, the Administration is giving itself the opportunity to “nationalize” the banks that have the worst balance sheets and greatest needs for capital. Those financial firms can try to sell assets, which may work but takes time. They may turn to the private capital markets where their attempts to raise money after getting low stress test scores will fail. That leaves them with the government as the lender of last resort. For a bank like Fifth Third (FITB), which is rumored to have financial problems and only has a market cap of $2.4 billion, a government cash injection of $1 billion could effectively turn Fifth Third into a de facto government-controlled company.

The stress tests are a clever way to the Administration to get troubled banks under its thumb without having to liquidate them. It is also a way to severely depress the value of common shares, and, in some cases, the value of paper held by creditors. In that way, the rescue of the banks is beginning to look like the rescue of Chrysler.

Douglas A. McIntyre

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