The stress test results are finally official. No more beating around the bush. No more mysterious leaks to the press. The Fed is requiring 10 out of 19 banks to raise a total of $75 billion to cover capital shortfalls in the event that the “worst case scenario” for the economy becomes a reality. Whether the Fed’s interpretation of the worst case scenario for the economy turns out to be as bad as the actual economic performance of the economy is an entirely different question. Given that the Fed never thought there was a housing bubble, thought the subprime crisis was contained and sort of missed the whole credit crisis until banks were coming apart at the seams questions its ability to forecast a worst case that’s even in the ballpark. Nevertheless, just keep buying bank stocks. Everybody’s doing it.
The Fed is forecasting losses of up to $600 billion for banks through the end of the year. $600 billion sounds fairly ominous and worst-case-ish, but there are estimates in the trillions floating around, so only time will tell what the final tally will be. Bank stocks have rallied so powerfully since the March 6 low that raising capital right now doesn’t appear nearly as daunting. Already, Wells Fargo and Morgan Stanley have announced common equity offerings. It’s best not to dilly dally as there’s no telling if and when sentiment turns again and bank stocks take another drubbing. What to do if you’re GMAC and you’re privately owned by GM (on government-funded life support) and Cerberus (worst private equity investor of all time) and the government just told you to raise $11.5 billion? Maybe GMAC will give its bankers a call. I hear they just raised a slug of new capital they need to put to work.