Stress Tests Delayed: Market Rife with Rumors and Speculations

The highly anticipated results of the stress tests on major US banks have been delayed until Thursday, creating a frenzy of rumors, speculation, and "leaked reports" about which banks will fail the tests. Among the reported banks in need of more capital are Bank of America, Citigroup, Wells Fargo, SunTrust, and Regions Financial. These banks are negotiating with regulators over the amount of capital they need to raise, attempting to convince them that they are healthier and better-capitalized than they actually are.

Key Takeaways:

• The delay in stress test results has led to widespread speculation and rumors about which banks will fail the tests.
• Bank of America, Citigroup, Wells Fargo, SunTrust, and Regions Financial are reported to be in need of more capital, with the banks attempting to convince regulators that they are healthier than they actually are.
• Some banks are trying to convince regulators to use their first-quarter 2009 results to project their revenues for the next two years, which could further undermine the credibility of the stress tests.
• Many banks had strong first-quarter performances, but these results are unsustainable due to factors such as low funding costs and refinancing.
• Major banks, including Bank of America and Citigroup, benefited from large AIG payouts and strange accounting rules.

Statistics:

• Bank of America recorded a profit of $2.2 billion in the first quarter, resulting from widening credit spreads.
• Citigroup recorded a profit of $2.5 billion, also due to widening credit spreads.
• Morgan Stanley recorded a loss of $1.5 billion due to tightening credit spreads.
• The SmarTrend Alert system indicated a downtrend on AIG on 10-10-2008 and an uptrend on C on 11-28-2008, and on STI on 12-04-2008.