Thursday, February 26, 2009

Bank Stress Test

I think that the guys in Washington are getting this one about right.

The country's 19 largest banks are about to be stress tested in order to determine what will happen to their balance sheets in the event of another leg down in the economy.

"According to the new Treasury Department guidelines, the banks would have to assume that the economy contracts by 3.3 percent this year and remains almost flat in 2010. They would also have to assume that housing prices fall another 22 percent this year and that unemployment would shoot to 8.9 percent this year and hit 10.3 percent in 2010."

If, under the simulation, a bank's capital levels are not adequate, that bank would be given 6 months to raise additional capital. If they can't raise the money, the Fed will invest in additional preferred and undoubtedly increase restrictions on bathroom breaks and pencil purchases.

Some are arguing that the above doom and gloom scenario is not harsh enough, but if the future is worse, we have a lot of ground to cover in between now and then. It is encouraging that there is some semi-transparent analysis behind whether more taxpayer money will go to the banks. Ironically, though, it is the opposite of investment research. The worse a bank's balance sheet is, the more likely the U.S. is going to own a bigger stake.


More scammers doing the perp walk:

Four People Arrested in Three Separate Fraud Cases, FBI Says
By Patricia Hurtado
Feb. 25 (Bloomberg) -- The FBI arrested four people in three separate securities fraud cases. James Nicholson of Westgate Capital Management was taken into custody this morning by FBI agents, said Jim Margolin, a spokesman for the FBI’s New York office.
Paul Greenwood and Stephen Walsh of W.G. Trading were arrested on what authorities believe is a $550 million fraud scheme.
Mark Bloom, who used to work for Greenwood and Walsh and now heads his own firm, was arrested on a separate fraud scheme.

Last Updated: February 25, 2009 10:40 EST

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