Thursday, May 7, 2009

Some Thoughts on the Stress Test Results

1.The Citigroup capital raise of $5.5 billion that will be needed to meet stress test results is misleading. The number is actually over $30 billion, but Citi has already announced that it will convert the preferred stock that the Fed holds into common. This will make Barack Obama the largest shareholder in Citi. Forget all this talk about "the taxpayers" owning Citi. Will "the taxpayers" get to vote at Citi shareholder meetings? Will "the taxpayers" see Citi bank dividend checks in the mail? Answers: no and no. Bottom line, if you want a Citi bank loan, go see Obama and explain to him how many re-election votes he will get as a result of loan to you.

2. The notion that the conversion of preferred stock to common is the same thing as going out and raising money to strengthen a balance sheet continues to be one of the most bizarre concepts I have ever heard of. How come we aren't hearing anything about this nonsense from the major accounting firms? Have they all turned into Bob Newhart wimps?

3.You have to wonder how Goldman Sachs would have fared in the stress test if money wasn't shoveled to them through the AIG bailout. And just how did the government's fair haired boy Jamie Dimon at JPMorganChase end up not needing to raise any capital? Was it because, as we all suspected, he was gifted Bear Stearns and Washington Mutual where he sold off non-strategic for big time cash?


  1. The accounting chicanery is what gets me as well. Ken Lewis (Bank of America's CEO) sent a note to Associates stating that in terms of "total" Tier 1 capital the bank was adequately capitalized but it was the "common" tier 1 capital which was deficient in the government's eyes.

    If I had to guess I would surmise that banks scored exactly what the US Government wanted them to.

  2. The main benefit from converting TARP preferred to common is improved cash flow, from not paying preferred dividends.

    The TCE change seems like a shell game. However when the U.S. owns most of a bank's common, they have the power of proxy to control the board.

    If banks issue bonds to improve their capital position, interest expense increases. Uncle Sam backstopped Goldman Sachs bond issuance.

    Selling more common means dilution. We'll find out how much for those under the gun.

  3. @PEU

    I am not sure there is even much of a cash flow benefit. Thta's being promoted by some academic who has probably never set his foot in a board room. Remember, this is preffered stock. A board still has to declare the dividend and if times aren't good the board is fully justified in not paying out the dividend. Thus, no damage at all to cash flow.

    TCE is a shell game about power.

  4. Robert Wenzel's comments hit spot on!!....

    I believe as time goes by and if the WMI cases are allowed to proceed more and more of the American public will realize WaMu was no different than any of the other big banks......If it had been given the opportunity of being involved in the govt's sham "stress tests"...It would have shown WaMu as solvent and would have been given the opportunity to raise more capital just like all others, if WaMu indeed needed to.....

    However WaMu was gifted to JPM to help their balance sheet....and hopefully more citizens will learn the lawsuits go forward with the discovery process.

    I am still Washington govt leaders are sitting on the arses...instead of raising hell with federal govt and getting involve.....sad sad day for the State of WA.....