Wednesday, February 25, 2009

The Non-Stress Test Leads to Non-Nationalization

The stress tests are coming, and bankers ought to be feeling the stress:

Regulators set a six-month deadline for the biggest 19 U.S. banks to raise any new capital deemed necessary after a review of their balance sheets.

The regulators will complete their so-called stress tests by the end of next month, the Treasury said in a statement in Washington.

What exactly do these stress tests really mean? I'm not a bank examiner, but I do understand human nature. Regulators dropping into the nation's top ten banks have less than a month to examine trillions of dollars worth of assets that are already hard to value. This would be a herculean task even if the examiners from the Fed and FDIC weren't already understaffed and overworked. I expect that a lot of questions about troublesome assets will be ignored or assumed away to clear the way for the next round of capital infusions.

I am quite sure that these stress tests are nothing more than a palliative to convince the public that something is being done to hold banks accountable for their performance. The current approach of throwing good money after bad to support the collapsed balance sheets of bankrupt banks will continue. The nationalization trial balloon has been deflated:

Federal Reserve Chairman Ben S. Bernanke said while the U.S. government may take “substantial” stakes in Citigroup Inc. and other banks, it doesn’t plan a full-scale nationalization that wipes out stockholders.

Get ready for more of the same. The stock markets are certainly in for some stress.

Nota bene: Anthony J. Alfidi is short uncovered calls on XLF.