Showing posts with label Stress Tests. Show all posts
Showing posts with label Stress Tests. Show all posts

Wednesday, May 6, 2009

Memo to the Obama Administration: Has Bank of America CEO Ken Lewis Stressed You Out Enough Already? There’s an Easy, and Long Overdue, Solution.

Stress test results are about to be released. The Wall Street Journal is reporting that as many as ten banks will fail the test, and will need to raise more capital. One of these banks is Bank of America, and this morning's reports indicate that BAC will need an incredible $35 billion to shape up. CEO Ken Lewis has been saying for more than two months that the firm he leads will not need any more government money. Oops.

If today's reports are correct, Ken Lewis will have been wrong, very wrong, once again. While shareholders couldn’t muster the votes needed to push Ken to Pebble Beach full-time, what are we to make of a CEO who has a remarkable record of being wrong? It’s actually worse than that. Ken seems to think that he is absolutely right (to buy Countrywide, to buy Merrill Lynch, to fire John Thain) when in fact he is terribly wrong. And now yet another insult to shareholders. Bank of America is still in trouble, BAC is failing the Fed’s stress test, BAC is unlikely to soon pay back the money it has already received from the government, and BAC will need more capital to weather the financial storm. Capital that almost certainly will need to come from the government, again, whether in the form of a preferred-to-common stock swap, or new money entirely.

The big question is whether the Treasury will insist that Ken Lewis must go if the bank is to move forward. There can be no fathomable reason to keep him in the top job at this point. Even Vikram Pandit at Citi has done a better job than Ken Lewis. Or at least it wasn’t Pandit that put Citi into the mess it’s in. But it was Ken that put BAC into the mess that it is in. If Rick Wagoner had to walk the plank, how in the world can the Feds keep Ken Lewis in the corner office? It’s time.

Tuesday, May 5, 2009

Stress Tests: Raising Capital at Citi, BofA, et al. the New-Fashioned Way

Have you ever had a real stress test? You get wired with electrodes that monitor your heart, and then start moving on a treadmill to see how much you can stand. Hopefully, you make it (there's a doc in the room in case you have trouble). Stress tests are a standard diagnostic device to assess our cardiovascular health.

Stress tests from the Treasury, however, seem to be of a somewhat different ilk. Yes, there is a test of your financial health, and there are doctors in the room (mostly Ph.D.s in economics from Harvard). But that's where the similarity ends. While a clean bill of (physical) health lets you live longer, stress tests that demonstrate you are in trouble only lead to more money from the government.

Treasury stress tests will require failing banks to raise money, but where is this going to come from? Independent investors are not exactly rushing in. Banks will need to sell assets to raise capital, but there are only so many Japanese businesses for Citi to sell before they come up against those toxic assets that nobody wants. So that leaves the federal government. For banks that are already in hock to the government, there's not much more downside to taking a little more cash. So, we have the topsy-turvy world of modern finance. Banks are better off if they fail their stress tests than if they don't! You fail the stress test on your heart, you die. You fail the bank stress test on your finances, you get to live longer.

Perhaps a slight exaggeration, but perhaps not.