HOW'S THAT AGAIN?

The Treasury announced today that the results of the "stress test" on the largest banks in the United States would be released to the public sometime in May. Well, that's not exactly correct; SOMETHING relating to the results will be released in May but it appears that just what that may be has yet to be determined. The news was met with a yawn but as we said in A Walk in the Sun, nobody died. Oh, to be sure, one can assume that some banks were found to be in better shape capital wise than others, but just who those laggards were has not and may never be announced. Forgive me, but I'm having a hell of a time trying to figure out how, with the limited resources available to the Treasury, 15 or so financial institutions with assets totaling God knows what multiple of a Trillion dollars, operating in 172 countries could have been tested in approximately a two month period. Color me skeptical. The other thing I'm wrestling with is the nature of the test itself which, if reports be accurate, was primarily designed to determine the capital adequacy of the institutions in question. Loyal readers will recognize that when the words "capital" and "banks" are juxtaposed, I tend to have a sissy-fit, but for the sake of argument let us stipulate that there is value in this kind of exercise to anyone besides a regulator (although only God knows who that might be). If this be the case it immediately becomes apparent that some remarkable conclusions had needed to be reached in a rather short period of time, to wit the ENTIRE asset books of these institutions needed to be examined and VALUED to the agreement of the involved parties, otherwise the entire exercise is a complete nonsense. Yet this is what we are supposed to believe. Forgive me if I opt out.

Anyway, now that this determination has been made, the next step (other than the public being made aware of something) seems to be the requirement that all or most of the banks raise capital within a six month period or have capital provided to them by Our Hero and his mob. Remember this "confidence" thing that I have been talking about? Let us suppose that a majority of the banks approach the capital markets to raise common equity in the next few months. What happens to those who do not? Well, two things: either they are in a position to say, "We don't have to," or, "We choose not to." The first comment may pass muster, the second will be interpreted as, "Nobody will buy our stock," and essentially become the kiss of death. Of course that might even become the case quite early on if one of the institutions involved, for competitive purposes (THEY WOULDN'T DO THAT WOULD THEY!) leaks the perceived status of a competitor. That is one scenario. Another is the market, being aware of the possibility of a flood of bank equity issues decides picking and choosing is a mug's game and simply steps back or, which may be a bit more accurate, causes a rush to the market to be first in line thereby penalizing those who are unable or unlucky enough not to be able to move quickly. For the government to mandate an entire class of issuers to access a roiled market essentially at the same time may not be the cleverest idea ever devised.

And what of the poor souls who can't raise public capital at all? Two options are all that appear to be available. Either accept even greater government ownership and all that entails (you pay peanuts you get monkeys) or rapidly downsize through forced sales of--by definition--the most attractive and valuable--assets. Somehow, I simply don't believe any longer that it is the plan of Our Hero to allow this moment in time to go away without an enormous effort of the part of the government to restructure the entire industry with vast new amounts of government control and influence using this approach as an excuse ("We tried for a market approach but...").

Whilst the future is still a bit cloudy, it appears that The Leader and his administration is bound and determined to take the country as rapidly as possible in the direction mandated by the more liberal wing of his party. Elections do have consequences and as he has said, "We won." Fair enough. This movement is going to cost a great deal of money, however, and I suspect not all of it will be allocated by a Congress that is just becoming aware of what may be the beginnings of a voter reaction to increased deficit spending. Compliant financial institutions are rather valuable in such a scenario. We have seen examples of such public and 'private" partnerships throughout the world. Why not here? I make no value judgment as to the intelligence of such an approach in our time. It just appears that this is the way it may play out. Who knows, The Leader may well make the trains run on time. More about this tomorrow and the role the Federal Reserve might play in this brave, old world.