I continue to be amazed at the bank cheerleading in the press.
Admittedly, article writers are not responsible for headlines, so I do not know who to hold responsible for this New York Times item, “As Stress Tests Are Revealed, Markets Sense a Turning Point.”.
How much have bank stocks rallied since March 9? Declaring the up move today a turning point is nearly two months late.
And while writer Eric Dash does cite a litany of possible positives, as well as some cautionary notes, a more realistic assessment comes from reader Dean:
What I don’t understand is market reaction. We now know that the main motivator is for government to avoid further TARP infusions if they can be avoided.
Message #1 from government: if real trouble appears it would not be politically easy to provide additional support; a less refined version of the same message is “banks you are on your own”.Message #2: Conversion of preferred to common. Taxpayer conversion from lender status to a partner status assuming both risks and rewards (mostly risk). The message here is that existing stockholders will take a hit through dilution…unless…banks sell assets or raise private placement equity. For such to occur you need optimistic markets and financials rallying.
Am I the only one who sees the blatant manipulation? How can this be good for existing stockholders? So why are financials rallying? The regulator has become a stockholder.
One characteristic of the moves to shore up the banking industry to date is that (when they are deliberate) they have been based on undue optimism (Bernanke’s ’subprime is contained”, the belief after each of the first three acute phases that the interventions were successful and no more needed to be done, the assumpton that non-recourse loans will induce investors to overpay markedly for bad assets) followed by panicked overshoot when things got bad (75 basis point rate cuts, TARP, letting AIG put up full collateral for counterparties).
So my best guess is that this is a quite deliberate effort (there are credible reports of active efforts to squeeze short sellers) to pump up the bank stocks to facilitate their fundraising. John Dizard had urged central banks sponsoring road shows nearly a year ago to help them raise the needed equity. I’d prefer an open sales effort to this mingling of hucksterism with supposed regulatory policy. And they have clearly been intermingled. Note how the prime objective of the stress tests has been above all to restore confidence. Huh? The most important aim should be to assess their condition so as to determine what if anything needs to be done. To subordinate proper regulatory action to reassuring “the markets” is backwards. If the public had faith in the integrity of the process, the need for a confidence exercise would vanish.
And pretty much no one who has thought about them likes this exercise. The New York Times sponsored a mini op-ed on the stress tests. I’m sure they would have liked to get a spectrum of views, but everyone they got to opine either hated them or damned them with very faint praise.
A separate Orwell sighting is the degree to which otherwise sensible people have fallen for the idea that banks are above the law, From Felix Salmon:
I fear that in the wake of these stress tests, Treasury will have created an atmosphere of antagonism and mistrust which is going to make it almost impossible to push through the kind of root-and-branch regulatory reform that’s desperately needed. Without the banks’ buy-in, no new regulatory structure is going to work — but right now the banks have every incentive to hide things from Treasury and the regulators, rather than to work with them to strengthen the system as a whole. The stress tests might end up improving the banks’ TCE ratios — but that doesn’t mean they will end up improving the health of the financial system as a whole.
Since when do the regulated get a vote on how they are regulated? Only in our modern world of a banking lobby that runs Washington, but this is NOT how regulation is supposed to operate. A regulator has the power of life and death over its charges. If he pulls their license, they are out of business. This idea that the regulated can negotiate as equal partners is truly bizarre.
I e-mailed Felix’s paragraph to Marshall Auerback, who replied:
He’s completely wrong. If you read Michael Perino’s account of the Pecora hearings, you’ll see that the banks fought this tooth and nail the whole way. Perino is a professor of law at St. John’s, currently writing a book on this right now. He was on Bill Moyers’s show a few weeks ago and said this:
MICHAEL PERINO: Glass-Steagall, or the idea behind Glass-Steagall, to separate the commercial banks from the investment banks, had been an idea that was floating around since at least 1930. And essentially, the political bias toward keeping everything the way it was, was sufficiently strong that the idea went nowhere until Pecora showed all the things that the securities affiliates were doing that were improper. And within six months, Glass-Steagall was passed.Pecora’s hearings basically discredited the Wall Street chieftains and created the political conditions to regulate them properly, which is why this is being resisted so aggressively this time by Wall Street. M. Rodgin Cohen [managing partner of Sullivan & Cromwell] is already leading the fightback. Yesterday, he even had the gall to say that the system as currently constituted was fundamentally sound. Yes, for him and a handful of Goldman partners, I’m sure that’s true, but on planet earth, it’s a bit of a different picture.
Sukh Hayre 
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BoA, Citi, and the lesser zombies can’t sell term debt without a government guarantee. They can’t sell commercial paper period, except to the Fed. They won’t be selling common until Treasury’s stakes are gone. This is going to continue the same for years. And one awful trading quarter–or another round of write-downs by European banks–and the fun will be on again.