Tests Are Over But American Banks Are Still Stressed

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Economist, James Galbraith, on bank stress tests

The results of bank stress tests released this week, do not bear good news. The bottom line is that at  total of $75 billion needs to be raised from 10 major banks to prop them up for losses that could come from a deepening recession.

Here is a Top 4 summary of who needs what in the next six months:

  • Bank of America (BAC) will have to raise $33.9 billion;
  • Wells Fargo (WFC), $13.7 billion;
  • GMAC (GJM), $11.5 billion; and
  • Citigroup (C), $5.5 billion

The question people are asking is whether this is the worst news yet? Or whether it is news that the worst is over?

There is no easy answer. The truth is that if unemployment continues to rise, housing prices continue to fall and the economy continues to shrink, then much more money might be needed as problem bank loans could be on the rise.

Where will the money come from?

The hope is that bank stocks will be low enough to be extremely attractive for private investors. But is this realistic? The taxpayer might just end up pumping more money through the system.

If the government needs to get involved, then the situation will be different.  Banks will raise more money by converting preferred stock to common stock which is believed to be a more effective cushion against losses.  But this makes the government a bigger shareholder and we all know that ‘nationalization’ is is not favorably looked upon in America.

Why not let the institutions fail? Does America have the wherewithal to do so? Send us your thoughts.

Read the press release from the Fed here.

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