Monday, May 4, 2009

Stress test results: Who is leaking?

The FT has yet another story about the stress test results – this one being that Bank of America and Citigroup have to raise $10 billion each.  Apart from the obvious which is that Citi appears to need more than Bank of America the whole story (and most of the competitor stories) have left me perplexed.

It’s not the numbers.  There are too many assumptions in bank accounting to make their capital position anything other than an educated guess.

It’s the source of the leaks that perplexes me.

We have had a (minor) scandal about Bank of America being instructed by Paulson (then Treasury Secretary) to consummate their marriage to Merrill Lynch.  

We know that somebody breached disclosure laws.  But in this case the somebody was Ken Lewis under instruction from his political overlord.  

I can’t think of anything more market sensitive than stress test results.  If some banks get massively diluted and other banks do not then some stocks will fly and others might languish.  This information is incredibly valuable.

Leaking is a market regulation breach of the first order.  Prison time.  And there is the odd State Attorney General prepared to investigate.

And yet the leaks seem to come thick and fast. 

I have no really good theory (though lots of bad ones) as to who would be breaching fair disclosure regulations on this scale and why they would be doing it?

And if you are going to be taking that risk why wouldn't you do the obvious trades and get filfthy rich?



farfadet said...

How do you say a "rideau de fumée" in English ? A curtain of smoke ?
I mean a huge quantity of smoke whose purpose is to hide what lies beyond.

Well, looks like the whole concept of the "stress test" is a curtain of smoke. Unless of course you're a Doctor in mechanic of houses of cards built on quicksands, that's the way I perceive the system.

Looks like they have to manage with a Gordian knot through this banking "industry".

No "classical" way for the system to become solvent. Do not know what we'll be used as the sword to cut it.

Whatever, kinf of hell lies beyond the smoke.

I Wish american's people something, for luck won't be enough I don't know what this something is.

Perhaps this something may only come from the "bottom" or the "heart" of your country for you've definitively been betrayed by the "elite".

Anonymous said...

probably someone who can't make money on these trades. treasury employee perhaps. but who knows.

Advant Guard said...

These leaks are just guesses from subsidiary actors who don't know details of the results. One leak says 2 banks will need capital. Another leak predicts 6 banks will need more money. A third guess is 10 banks will have to raise funds. The next leak will probably insist that 36 of 19 banks are insolvent.

Anonymous said...

How about the fact that everyone and their dog on Wall Street can see market manipulation occuring in the extended hours hours both in the futures and various stocks. Why haven't we had a correction. Why have the technical indicators been so off? I think they have extended the date so that volume will remain low, thus allowing them to pump the markets up even more before releasing the results.

jazz said...

"...incredibly valuable"?

"And if you are going to be taking that risk why wouldn't you do the obvious trades and get filthy rich?"

WHAT obvious trades? What market movements have you seen that were based on actionable information? I'm amazed that there have been SO FEW LEAKS (while agreeing perhaps that there has been way too much unattributable scuttlebutt). Sure, lots of folks trade on scuttlebutt, but it's hardly incredibly valuable.

JoshK said...

Maybe the Fed wants the market to adjust gradually. Especially with the borrowing situation now for Citi. Might be a lot better to give the market a week or two to gradually incorporate than to just drop the bomb.

PPY said...

Why isn't FBI investigating the leaks? There is insider information everywhere. Remember Sheila Bair said a leak led to Wamu seizure on a Thursday instead of the normal Friday? So why not subpoena her and get the investigation started?

Please take a look below; where do the leaks about these banks being monitored come from that led to bank runs and are these really the least cost solutions? Smaller Banks were told to raise capital yet somehow these deals with newly found private investors fell through, resulting in FDIC seizures.

This is the story from First Bank of Idaho... It is digusting how cold-blooded and reckless some of these financial regulators have become!!!

"First Bank of Idaho Board Member Takes Case to D.C.

“The FDIC says they will lose $191 million because of what has happened, but if they’d waited a few weeks it never had to happen,” said Schauer. “That’s 191 million reasons why this takeover should be undone. Now the losses are incalculable,” she said. “A $35 million loss to our shareholders, the loss of more than 60 local jobs, which is a huge number of jobs for this area, the payroll that won’t be spent here, the taxes that won’t be collected here, the home foreclosures. People here know how much this bank has done for the community, and it’s a calamity for many small businesses.” "

First Bank of Beverly Hills Cost To FDIC: $394 million

"Orchard First asset managers call off deal for Beverly Hills bank"
"The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $394 million.",0,5596258.story

New Frontier Bank Cost To FDIC: $670 million

According to the bank president, though he followed FDIC's instruction and tried to raise more capital, that "deal was doomed because [at the same time] the FDIC offered a sweeter deal... the icing on the cake being that the FDIC would take the bank's troubled loans out of the deal... When the FDIC has you out on the bid process, why would anyone buy you.. he also expressed frustration with [TARP], $53 million of which New Frontier Bank would have qualified for based on its size... [but] was denied... he called the process politically corrupt... it will cost the FDIC... $500- $750 million... if they give us $53 million we could save it."

Farmington Hills Bank Cost To FDIC: $71.3 million

"Four days after a deal with a private investor for an infusion of capital fell through, state and federal regulators have closed Michigan Heritage Bank based in Farmington Hills and announced the transfer of its deposits to Level One Bank."


J.D. Swampfox said...

The leaks come from the government. It's orchestration. The $10B figures being floated are a pittance compared to the truth, so the plan is for the public to think, "if that's all they need, then there's no real problem with the banks..."

Kevin S said...

The leaks are by design... they don't want to surprise the market on May 7th. THey have been testing the waters with each successive leak. Leaks like this are not by accident. I imagine each bank and the government are very clear about what is to be leaked and what is not.

REgarding mr. anonymous asking why we haven't had a pullback... look at the fed pumping each week. It is going directly into the Primary dealers. THat has been huge. Also, capital ratios at banks will no longer be under pressure...hence there will be no deleveraging/major sell-off unless they are forced to sell off their legacy loan portfolio (keep in mind they will be marking up their toxic asset portfolio still to offset the loan writedowns).

Dikaios Logos said...

Echoing "Advant Guard", "J.D. Swampfox",and "LIQUID MAN": who knows for sure these are leaks? Business types tend to simplify their games. For political types, the games can become nearly everything. I think more than true leaks, we are seeing some serious games being played. If the players are any good, we are almost all way off base.

Kevin S said...

I concede that we can't know for sure that these are leaks. EVery gov in the world leaks different things to the press. It is a common strategy used for various reasons... one of which is to gauge/prepare and/or shape public opinion. The fact that these each "leak" includes various companies could be one indication that these are not by accident.

yea, games are always being played in the markets. True, but when the CHairman of the Federal REserve, secretary of treasury and president are involved and have all indicated their awareness of just how important the release of this info is, my bet is that we would find out only what they want us to.

apj said...

Whaddya mean who's leaking?? Officialdom is boiling the market frog, leaking news it deems appropriate to do so. It's common practice, and not a scandal. Better than lumping it on the market in one go. I sincerely hope they ho hard with the capital raising demands. This is the best result for the market and the banks. Imagine if they flipped the bird to the (very) recent IMF estimates of calital needs.

Anonymous said...

Well, the "obvious" trade (selling Citi, BoA, Wells) would not have worked so well yesterday as the shares rallied...

M said...

Not related .. or maybe it is?

Were some banks chosen to survive and others destined to fail in order to shore up the ones that needed to survive?

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.