You may recall, when Barack Obama and his lieutenant Timothy Geithner revealed their plans to save the banks, an important part of the strategy was a stress test which each bank must undergo. The tests would consider how each bank would survive in the event that the recession worsened, house prices fell further, business failures increased.
Any bank that then failed the test would be forced to raise more money.
According to a report in the Wall Street Journal this morning, two of the most important banks in the US have failed the test.
Do you remember getting the results of your exams? Maybe they came in an envelope, perhaps you had written the envelope yourself, so the dreaded letter that seemed so important had your own familiar hand writing scrawled on it.
Well, across the US of A, it is like that for the banks.
And it seems that Citigroup and Bank of America got a big “F” grade.
It is only a rumour at this stage. And no one seems to know how much money they have to go out and raise.
But it spooked the markets, and shares in both banks fell heavily.
It’s tough if you did get the dreaded “F” mark. You have to go out and raise money, but the very fact you did so badly with the stress test means it is that much harder to raise the readies.
Mind, it is understood that the two banks are questioning the findings. They reckon the stress test itself used the wrong formulae. So, in return, they have given the stress test an “F” mark.
It is all bad timing for Bank of America’s boss Ken Lewis, who is facing a fight for his survival as the top man at the bank later today. Shareholders are livid with Mr Lewis for the way he handled the purchase of Merrill Lynch, which turned out to have much more serious debts than people realized.
It seems that Mr Lewis and his team didn’t produce sufficient due diligence. Then again, they argue they were put under undue pressure by the then US Treasury Secretary Hank Paulson.
Similar stress tests are being imposed on British banks too.
The IMF recently estimated that total bank losses relating to the economic crisis will eventually come in at around $4 trillion. Only a third of this amount has been allowed for so far.
© Investment & Business News 2013