Thursday, May 7, 2009


The results of the Fed's stress test of major banks are finally in, projecting how much loan losses banks might face under adverse financial circumstances.

Between credit extended for businesses, mortgages, and consumer loans, under the worst case scenario they considered (basically a mild economic contraction over the next two years—not the worst case scenario possible), banks stand to lose upward of $600B; $186B from mortgages alone. Ten of the 19 banks looked at are undercapitalized, needing raise close to $75B total by this November. Bank of America is the worst offender, needing to raise $34B, Followed by Well Fargo at $14B, GMAC at $12B, Citigroup at $5.5B, and the rest under $3B or not needing to raise any capital. Bank of America and Wells Fargo are no doubt dragged down by their accumulation of Countrywide/Merril Lynch and Wachovia (who before that had acquired Golden West), respectively.

So, the test results today confirm the presence of severe undercapitalization in the system, and major losses as the credit contraction moves forward. The tests seem to have been conducted responsibly; perhaps skewed a little too optimistically, but not sugarcoating the problem either. I'm going to hazard a guess now that the economic contraction will exceed their worst case scenario, and another stress test will be needed before all is said and done.

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