It looks like Washington is finally giving up on the silly idea that all banks are having the same financial hardships. The Obama administration confirmed Wednesday that the government will release some of the results of the stress tests currently being conducted. The results of those tests will determine how much funding banks will need in order to survive a longer recession. It’s widely expected that none of the banks will actually fail the test. But that doesn’t mean everyone is going to pass with flying colors. Some will most likely do better than others which could mean that they will be forced to raise more capital. In addition, banks that don’t perform well may be punished by investors. But if that happens, so be it. It’s not the job of the Treasury or FDIC to prevent investors from selling off shares of banks that have poor fundamentals.
The U.S. Treasury Department already tried to keep investors from panicking, and that failed miserably. When former Treasury Secretary Henry Paulson unveiled the Troubled Asset Relief Program, or TARP, last October, nine top banks participated in the first round of funding, while others, most notably JPMorgan Chase and Wells Fargo , reportedly objected to the idea that they needed government funding. In the end those banks were force-fed TARP money so that Paulson could spin TARP as a program that healthy institutions would use to build capital to increase the flow of financing to U.S. businesses and consumers.
Paulson feared shares of problem banks would be crushed if the Treasury Department positioned TARP as funding only for troubled banks. But that’s exactly what happened anyway. From the time that Paulson first unveiled the TARP last October up until the market hitting its low point in early March, the banks in most dire need of capital lost much of their market value. Shares of Citigroup and Bank of America which both required further injections from TARP after their initial round in October, each plummeted about 90%. Shares of Wells Fargo, which last week preannounced a better-than-expected profit, dropped 75%. JPMorgan Chase, which has remained profitable throughout the credit crisis, fell more than 60%. Even investment bank Goldman Sachs , which this week posted stronger than anticipated results and announced its intention to pay back the $10 billion in TARP funds it received last year, fell about 40%. Still, there were rumblings earlier this week that the Treasury was worried about Goldman’s plan to return its TARP money because investors may wonder why other banks weren’t ready to do the same. That just smacked of doublespeak. It’s not good to show signs of strength because it makes the weak look bad! Fortunately, it seems that Treasury has reconsidered its stance. And it probably had no choice now that the better positioned financial firms intend to force the Treasury to recognize that there are good banks and bad banks.
Goldman and Wells seem hell bent on doing everything they can to distance themselves from some of their more troubled peers. Insurer MetLife is doing the same thing. MetLife confirmed Monday that it is one of the 19 firms undergoing a stress test. That’s because it has a bank holding company that it set up in 2001 that has more than $100 billion in assets. But MetLife added that it decided to not apply for any TARP funds, citing its “strong balance sheet.” Expect JPMorgan Chase to tout similar strength when it reports its results Thursday morning. And that’s all good. The Treasury now believes that the strong banks, the survivors, will find demand for new money and will be able to raise it privately.
