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Written by Administrator
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Sunday, 10 May 2009 |
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ZTKZW85MXHPW Bank stocks have seen an enormous market rebound leading up to the release of the stress test results. Ironically, the two stocks that saw among the biggest gains were Bank of America (BAC) and Wells Fargo, each of which the government proclaimed would need substantially more capital. Am I the only one who thinks this is crazy? Anyway, there is a much more worrying angle to this story. First, the metric used to measure the health of the bank balance sheets was "Tier 1 common capital". Ever heard of it? Neither has anyone else. That's because it was chosen because it made the banks look a whole lot healthier than they actually are, as reported by the Wall Street Journal . So the capital the government let the banks take credit for is dubious at best. Secondly, the banks themselves lobbied mercilessly, and by and large, won major concessions from the government. These negotiations dropped the total capital shortfall more or less in half.
Finally, the recent rebound in earnings were largely driven not by underlying strength of their operations, but accounting tricks. For example, the FASB under pressure from the government, more or less suspended mark to market accounting. Which means the banks can value all those "toxic assets" on their balance sheets however they want. Which really makes you wonder about those balance sheets, doesn't it? So what does this add up to? Pretty much the fact that despite the recent run up of bank stock prices, they are nowhere near as healthy as the stress tests indicate. Probably the most worrying aspect here is that the government is either asleep at the wheel - again - or worse, deliberately being too lenient on the banks.
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Last Updated ( Thursday, 15 July 2010 )
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