Something is wrong here. As journalists it´s impossible to claim that we at BankThink and American Banker aren´t trying
Let´s break it down: The first premise worth noting is that the financial crisis is, on a certain level, a crisis of confidence. The cost of borrowing went up late last year when lenders suddenly realized that they couldn´t trust each other or any other company issuing debt. Back then, the experts were arguing over whether it was a liquidity crisis or a solvency crisis and the correct answer was even scarier: No one knew.
Now, remember how the Treasury tried first to pump money into banks to make them look healthy again, only to be met with harsh criticism from the public and Congress, as well as the still-more-chilling realization that the enormous sums given to the banks weren´t enough?
In came Treasury Secretary Timothy Geithner, with his sophisticated, secret plans. When he finally got around to sharing his closely held ambitions with the rest of us, we saw that they hinged upon a shrewd calculation: That the market wouldn´t settle for anything less than a clear division between winners and losers. Geithner didn´t actually admit this in a straightforward manner; he coquettishly refused to separate the banks into those categories, while simultaneously assuring investors that that he would find a way to show them once and for all who was healthy.
Great. Give us some top seeds! Will Citigroup be among them? I can´t wait to find out! But first, show us the power of that stress test. Is it brutal? Is it exacting? Will we really be convinced?
Apparently not. Rumors filtered out during the long wait for more announcements that the stress tests consisted of banks' own assessments of their viability sporadically verified by regulators. A white paper detailing the methodology used to perform the stress tests seemed suspect at certain points. For instance, here´s a sentence that seems to contradict almost every historical fact from the past four months:
"Supervisors have long indicated that common equity should be the dominant component of Tier 1 capital, so a measure of voting common stockholders´ equity (essentially Tier 1 capital less preferred stock, less qualifying trust preferred securities, and less minority interests in subsidiaries) was also examined."
Really, the supervisors had "long indicated" that TCE was an important measure? We´ve heard otherwise.
Anyway, now they´re over, and banks can contest their results. Does that mean that if Citi wasn´t in the top-rated bunch already it could argue its way up there? What a great way to boost confidence among investors.
But wait. We´ve already found out from several reliable print news sources that
And next week, the world will be blessed with more muddled, incomplete information about the tests, to be delivered by the authorities themselves. Of course individual institutions won´t be named, and these tests weren´t really about competition anyway. In his own way, man´s a winner.
And there you have it: the evaporation of any leverage the Treasury could have gotten out of the tests to compel banks to do things on things semi-independently, such as sell their bad assets to investors in the Public-Private Investment Partnerships at a reasonable price, or find a way to make the unsavory capital conversions into something more attractive to potential investors. And with its initial tough stance, Treasury offered us all a glimpse of the potential for something greater than this. Talk about the need for recapitalization.
