Thursday, May 7, 2009


The Stress Tests Results for the largest U.S. banks will be released today at 5pm (ET, US). While the results were supposed to remain confidential until this afternoon, there have been a good number of leaks regarding the needs of each of the individual banks. The blog Calculated Risk has posted a table with estimates of the capital needs of each of the banks. While the numbers are large for some of the banks (Bank of America tops the list with 34 billion), it seems that a combination of raising capital in private markets and public funding might provide the necessary additional capital. However, uncertainty will remain even after the results are presented this afternoon. Some will question the methodology (Are we really looking at the worst case scenario? How were the legacy assets valued?) but the debate is likely to be around how some of the banks in need of capital will raise new funds. The government would like to avoid providing new funds. One quick solution is to convert previous public funds into common stock. This solution has been criticized by Paul Krugman on the grounds that is simply an accounting trick (although it all depends on the methodology that the stress tests used, more this afternoon). In addition, such a conversion is moving us in a direction of slow partial nationalization, with the problems that Nouriel Roubini highlights in this FT article.

On the other side of the Atlantic, the ECB has decided to cut its interest rate to 1% and start purchasing Euro-denominated covered bonds. Not a big surprise. Here is the press release.

Antonio Fatás