Results of the Stress Tests

Tarpley & Underwood

Financial Advisors, LLC

Download this Article

RESULTS OF THE STRESS TESTS

Which Banks Did Well? Which Ones Didn’t?

Selecting a Financial Advisor | 2009 Tax Breaks | Time to Review Your Insurance | Real Estate Downturn Over? | Roth IRA Conversions in 2010

The Options. Banks that need to thicken their capital cushion can do so by:

1) selling selected assets,

2) raising new common equity from current shareholders or new investors,

3) applying any earnings that top analyst expectations toward their capital bases, or

4) converting preferred shares into common stock.

Step 4 is actually a cash conservation move – converting the preferred shares wouldn’t actually boost overall capital, but it would allow banks to eliminate preferred stock dividends.4,5 Consolidation is also a possibility. Some analysts wonder if the smaller banks among the 19 – thrifts such as SunTrust, Fifth Third, Regions Financial and KeyCorp – could end up merging with larger banks.6

The Treasury is the Lender of Last Resort. The government has instructed the banks to go to the private sector first before asking for any more federal money. Treasury Secretary Tim Geithner thinks that the “vast bulk” of thrifts needing more capital can capably find it “through private sources” in coming months.7 The still-developing Public-Private Investment Program (PPIP) could offer a way.

ion.

Is Washington Simply Managing Expectations? Stress tests have occurred for years in the banking world; the findings of such tests are commonly kept private. The government revealed these results with the goal of maintaining the public’s faith in the banking system – as if to say, “Here is the open book and here is how we are directing the banks to make things better.”

Some analysts wonder how credible the results are. After all, what would the government have to gain by saying a big bank was in big trouble? Investors would flee, and the Treasury would have to shell out more TARP money. Other analysts note that generating capital and bettering the balance sheet

doesn’t address the problem of removing toxic assets from the books of these banks.

On the other hand, the announcement of the stress tests did lessen the anxiety among investors this winter, when Wall Street fretted about the possibility of bank nationalization. The announced results do not look as negative as some investors had expected. Interviewed May 6, 2009 on Charlie Rose’s PBS program, Secretary Geithner noted that there are “very significant [capital] cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward.”8 Additionally, a growing number of analysts see the economy improving by 2010, which will hopefully help to reduce stress for banks.

These are the views of Peter Montoya Inc., not Tarpley & Underwood Financial Advisors, LLC and should not be construed as investment advice. Tarpley & Underwood Financial Advisors, LLC does not provide tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations.

1 money.cnn.com/2009/05/07/news/companies/stress_test_announcement/index.htm