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Pros Say: Stress Tests Not an ‘All-Clear’ Sign

Wall Street breathed a sigh of relief after Thursday's stress-test results, but didn't dispel the uncertainty over some of the most troubled financial giants. The stress tests—a key Obama administration effort to boost confidence in the financial system—showed nine of the 19 biggest banks have enough capital to withstand a deeper recession. Read and hear what the experts had to say...

Stress Tests: Not an ‘All-Clear’ Sign

Orin Kramer, chairman of the NJ State Investment Council called the stress test “the most comprehensive, forward-looking, transparent set of results” about banks. However, he warned that the test is not a sign for an all-clear zoneand that the banks are in a rehabilitation period.

A ‘Financial Surge’

A lot of these stress tests were self-examinations, said Camden Fine, president and CEO of Independent Community Bankers of America. He said investors should take the test results with “a little grain of salt.” He said the government bank intervention is a “financial surge” equivalent to the Iraq War surge, and questioned what would happen to the banks when the government eventually pulls the “surge” away.

Stress Test was ‘Perfect!’

“Everything’s perfect!” said Donald Marron, chairman and CEO at Lightyear Capital of the stress tests. He said the tests helped boost the public’s confidenceand that now is a good chance to refocus the attention from bank survival to bank earnings.

Economic Data More Important

James Paulsen, chief investment strategist at Wells Capital Management said the state of the economy is much more than the stress test itself. He said the banking crisis will start to fade when the economy bottoms, and so it is more important to focus on the economic problems at hand such as the housing crisis and the unemployment situation.

BofA Will Meet Stress Test Needs

Bank of America will be able to raise the capital required to meet the stress test levelswithin a few months, said CEO Ken Lewis. He said the company will use a combination of selling common equity shares and selling assets to raise the $33.9 billion gap the government is requiring of the bank.

Focusing on Individual Names

Christopher Sheldon of Bank of NY Wealth Management said the banks have come a long way since the beginning of the year. He said the stress test was a good starting place but it is now “much more important to focus on individual companies.” He said he would consider investing in some of the companies that need to raise capital.

Numbers Are On the ‘Conservative Side’

“You’ve got to remember that these are estimates, and I think these numbers are on the conservative side,” said Donald Powell, former chairman of the FDIC, of the stress test. He said the critical component is how much capital the banks will realistically be able to raise from now on.

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