Wall Street and the banking industry think the financial crisis is over. The Obama administration isn’t so sure. And that tug of war is playing out in the future of the TARP funds and the lasting value of the recently completed stress tests.
The financial industry wants the free market to be the deciding factor again, while the government is holding on to its interventionist ways.
"In 90 days you've gone from an attitude on Wall Street that the financial system is on the precipice to a feeling that happy days are here again," says veteran money manager James Awad, managing director at Zephyr Management. "This is all predicated on the consensus we are on the cusp of growth in the economy, which means the financial crisis is largely over and all we have to worry about is the degree of growth."
Though the Obama administration may not subscribe to that thinking, its policies have helped foster it.
"The stress tests were a great PR exercise, much better than they should have been," says Robert Brusca, chief economist at Fact & Opinion Economics, referring to the government program that examined how financial firms would hold up under worsening economic conditions and how much new capital they would need to cushion their balance sheets.
The stress tests were back in the policy debate Tuesday along with the mechanics of the TARP program, following the release of a high profile report from the Congressionally appointed panel overseeing the Troubled Asset Relief Program, which concluded the tests raised "serious questions."
"The short-term effect of the stress tests was positive, and the financial markets have calmed to some extent," the report said. "The fact that the holding companies have added certain amounts of capital on certain assumptions does not mean that the financial crisis is over or that the holding companies are now free from the risk of the sort of crisis-laden conditions many found themselves experiencing during 2008 and early 2009."
Capital is king in the current environment and the stress test results have driven home that point to investors. Not only did the tests raise capital requirements, they wound up helping banks raise capital as well as escape the stigma of TARP money..
"It's sort of remarkable really, but what it did was prime the pump for these firms that needed to raise private capital," said Robert C. Schwartz, a partner at Smith, Gambrell & Russell, which represents big and small banks in the Southeast.
A number of big banks, including Bank of America and Wells Fargo
, were able to raise tens of billions of dollars no sooner than the stress test results were released.
Another group — which passed the tests — quickly petitioned the Treasury to return their TARP funds — a request the government granted Tuesday to American Express , JPMorgan Chase , Goldman Sachs and others.
As many predicted months ago, the bailout process is creating an industry pecking order of winners and losers; unlike then, however, it no longer appears to bother many on Wall Street.
"If banks can raise capital, that’s telling you something," says Frank Sorrentino, CEO of North Jersey Community Bank. "The market is significantly better. You can look at the landscape and start to think about what you can do."
Banks that are able to raise capital are now seen as being willing and able to cope with the trillions of dollars of toxic assets embedded in the balance sheets.
"You would think that if people had raised capital they would have more flexibility to dispose of toxic assets," says Chip MacDonald, capital markets and financial institutions lawyer at Jones Day.
With the government having scaled down its plan for a private-partnership to buy troubled assets, the real work may now be up to the free markets.
Though some of the optimism may be warranted, more than a few are urging caution.
"It’s not just that the banks survive," says independent banking analyst Bert Ely. "It’s that they get to the other side and become well capitalized and are not holding on by their fingertips."
President Obama sounded cautiously optimistic in commenting on the administration’s decision to let the firms return the TARP funds, calling it a positive development but "not a sign our troubles are over."
Observers warn against reading too much into the government’s ascension to the request.
"The administration has to live with what it said," says Robert Glauber, a former senior Treasury official and now interim non-executive chairman of Fredide Mac. "The stress test was a decision to put before the market what really bad was and the good news was that really bad wasn't all that bad. They want to signal to the market and say the worst is over. This is perfectly consistent with what they want.”