Wednesday, April 8, 2009

Stress Test Results Delayed Until After Secondary Offerings

In my least favorite sign of spring the bicycle riding commuters have begun their annual return to the roads of Cambridge. While I am all for riding a bike to and fro (good for the environment, good for health yada, yada, yada..) what you have to understand is that the streets of Cambridge are not built for cars AND bikes. There is just no room. So now once again in addition to dodging taxis that are driven by crazy people and avoiding being crashed into by cell phone obsessed fools I must now also avoid collecting any bikers that are taking up road residence where this is no room. Love it!

Deflation Biased Statistics Are Driving the FED Insane
Ben "Deflation Will Not Happen Here" Bernanke must be wringing his hands at the incoming data he sees. While the FED tries every known move to "raise inflation expectations" the data that keeps coming out continues to work against them.

The FED after long years of massaging inflation component information (hedonic adjustments, using owners equivalent rent) to make inflation seem much lower that what it is, now the FED is pressed to find ways to make inflation seem even a remote possibility. It is a hard job.

With unemployment rising, deflationary forces have the upper hand. Add to this the decline in consumer borrowing (which should result in less consumption) and the picture is indeed grim. A while back the powers that be decided to change the housing component of the inflation equation. Instead of home prices as the standard gauge, the move was made to use "owner's equivalent rents". This silly substitute uses what a homeowner would expect to reasonably pay in rent for their residence. casting aside the problems associated with asking somebody what their home would rent for, rental prices are factored in as well.

With this in mind, take a look at some rent headlines:
Apartment rents fall in Southern California - 4% drop for LA County
US apartment market worsens with economy - vacant units depress prices further

With the Case-Shiller home price index showing monster declines in home prices, the FED has no place to turn for favorable inflation data. If fuel prices continue their weakness, all that is left is food and clothing.

I think of these things when the FOMC minutes have a line like this one:
"In the discussion of monetary policy for the intermeeting period, Committee members agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate. Such purchases would provide further monetary stimulus to help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth and price stability".

The FED's current problem can fit on a T-Shirt:
"With all that Liquidity all we got were lousy CPI numbers"

Stress Test Results Delayed Until After Secondary Offerings
The big news of the day was the report that the Treasury "stress test" results would be delayed. At first read I was not bothered by the headline. Initial estimates were for the results to be made public at the end of April. Whether that was the last week, last day or something else was never qualified, so I figured another week or so into May was not a bug deal for a complicated process. If that was all there was to it, no problem. Reading the news stories quickly put that mindset to bed.

It seems the Treasury has decided that any results may have an effect on the stock market. I know, how would have thought that might happen! As this Treasury department seems as obsessed with the stock markets as the current FED, this could not stand. The next nugget is that the results of the stress test may be presented as a basic summary, with no company specific information disclosed at all. I am not making this up, read it for yourself:
US to delay bank test results for earnings-source
WASHINGTON, April 7 (Reuters) - The U.S. Treasury Department is planning to delay the release of any completed bank stress test results until after the first-quarter earnings season to avoid complicating stock market reaction, a source familiar with Treasury's discussions said on Tuesday.

The Treasury is still talking about how results of the regulatory stress tests on the 19 largest U.S. banks will be released, and may disclose them as summary results that are not institution-specific, the source said.

The government is testing how the largest banks would fare under more adverse economic conditions than are expected in an attempt to assess the firms' capital needs. The tests are due to be completed by the end of April, but Treasury has said they may be finished before then.

The source, speaking anonymously because the Treasury has not made a final decision on what to disclose, said officials do not want any test results released before the earnings season wraps up for most U.S. banks on April 24.

Officials realize it may be hard to keep the results under wraps, and they are looking for ways the banks could disclose some details without unduly disturbing the markets. They are also looking at providing some summary information about how the banks fared.

"There will be definitely be some information that will be provided at the end of it, but exactly what that will be, and when it will be provided, will come forth later," Comptroller of the Currency John Dugan, who supervises some of the nation's largest banks, said last week.

The tests are designed to determine the depth of banks' capital holes if conditions deteriorate further. After the tests are completed, the banks will have six months to either raise private capital to compensate, or accept government funds.

But officials are worried about how the market will react to the stress test results if there is not a clear recovery path for a bank that is deemed to have a large capital need.

The last thing Treasury wants to do is set off a panic, the source said.

And the insanity keeps coming.

The Treasury is putting itself into an impossible position. Consider:

- It is known the banks are gearing up for the greatest window dressing of earnings ever seen on earth; armed with new accounting rules and AIG counterparty cash, earnings are expected to actually be posted (still very small) this time around.
- The stocks of the banks of course will rocket ride up after this.
- This will present the best time in over a year to raise cash by stock offerings while the euphoria is high.

This is the plan. Now the Treasury should have known, by looking at a calender, when the end of April is and the overlap with bank earnings. faced with possibly throwing water on the party of the banks, the Treasury will delay any information, and then give out vague information to make the markets guess who they are talking about.

If you are a big investor and would like to buy into a bank secondary offering (why you would want to do that exactly is your business!) how would you feel if two weeks later the Treasury says your bank is now "stress test" insolvent and must be "dealt with"?

The central problem with government intervention is that it quickly leads to all kinds of entanglements. The Treasury will be under ginormous pressure should bank earnings surprise to the upside to make public only positive stress test results. Otherwise they will be calling the earnings statements pure fantasy.

This situation is an unmitigated disaster. The stress tests were supposed to be, at least hypothetically, an independent assessment of bank health followed by a plan to address serious issues. All we have now is a future press release by the Treasury that cannot be credible to the upside or the downside.

Credibility is at an all time low for the government. This move just called into question whatever iota of credibility they have left.

Have a good night.


Anonymous said...


I'm getting so damn sick of all this government manipulation I can hardly stand it.

Change mark to market = under great political pressure

Change short selling rules AGAIN! = under great political pressure.

Barny Frank is going to hold hearing because Moody's DOWNGRADED municipal bonds = great political pressure.
Chris Rea Changing Times

Changing times - changing rules
Make a wise man look a fool
Gone before no longer here
Look out for these signs of
these changing rules
Better look out
You better look out
Look out for these changing times
Can't stop those changing times

Changing times cold hard rain
Everything's a changing
Nothing's gonna be the same
You'd better look out
'Cos you can't stop these changing times
Nothing going ever to be the same
You'd better look out
Look out for these changing times


watchtower said...

"...on the highway to hell..."

And on that highway you are bound to meet some tight spandex wearing road bicyclists : )

Anonymous said...

Go code pink