Banks Feel The "Stress Test"

Banks are again weak on concerns about the government's "stress test."

The first worry is we don't know what this "stress test" consists of. Some are estimating that it may require 6 percent Tier One capital, and 3 percent tangible capital. Many banks may not pass that test.

If they do pass, the worry is that continuing injections of capital will create "zombie banks" where the equity has been diluted to zero.

If they don't pass the stress test, is nationalization the option?

There is clearly concern that nationalization is a possibility. Just look at the preferreds of some of the banks: Bank of America's J-share 7.25 percent non-cumulative preferred stock is currently yielding 30 percent—a clear indication that there is concern that preferreds could get wiped out, which is what would likely happen in the event of nationalization.

This is the downside of nationalization—particularly for insurance companies, which are the largest holders of preferred financial stocks.

But you can see how thorny the choices are getting.

Fitch downgrades life insurance unit debt. As if they didn't need more trouble, insurers are weak midday because Fitch cut the senior unsecured debt of the life insurance units of Prudential, Genworth and Principal Financial.

Due to a downgrade by Fitch, Prudential Financial Inc is no longer able to participate in the Fed's commercial paper facility, a spokesperson told CNBC. But the company's insurance unit, Prudential Funding LLC may still participate.

"We continue to have access to the CPFF through the insurance company," said Bob DeFillippo, a spokesman for the insurer.

"Our total commercial paper outstanding is about $800 million, about $375 million of that can be attributed to the CPFF program."

"We're not shut out from the program because the insurance company can participate".

"We have ample liquidity and none of it is dependent on access to commercial paper market or debt capital markets," he said.

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