Bank Stress Tests and Nationalization

Wall Street Journal article on the recent bank stress tests: Stressed for Success?

In the wake of the stress tests, the weaker banks will now have six months to raise private capital to fill the hole identified by Treasury. They'll be desperate to do so, because the alternative is that Treasury will force them to accept more public capital. This will include the conversion of Treasury's preferred stock, bought last year via the TARP, into common shares.

Under accounting rules, this gives the banks more "tangible common equity," the measure of capital favored by Treasury. Yet it provides not a penny more in actual capital to absorb losses. Meantime, the feds would suddenly own big chunks of those banks via common stock, the way they now are the largest shareholder in once-proud Citigroup. We've called this a back-door nationalization, and it means Congress looking over banker shoulders. The silver lining is that bank executives are now so appalled by this idea that they'll sell anything that moves to avoid such a fate.

The folks at the Wall Street Journal are not the only ones that see this "very public" stress test of the banks as a ploy to nationalize the banking system. Think about, who out there is going to buy up potentially risky bank assets? That leaves only the Obama and his left over pile of TARP money - $110 Billion - conveniently the needed capital is $75 Billion. Read the whole column.