Farrell: The Stress Test Has Me Stressed Out

The Fed plans to release results of the stress test on May 4. Nobody is going to "fail" the test, but some may need capital, private or otherwise. There should also be some word as to how much capital would be needed.

On or about April 24, the Fed will announce how each bank is being tested: the specifics of the test and criteria being used. This dual date stuff confuses me and looms as a wild card for the banks. On Tuesday, some banks rushed to get ahead of the results by cutting dividends as they reported earnings. I would defer to Carole Berger, but it seems to me that the banks are writing off as much as they can and reducing dividends to say to the Fed they have, in effect, already raised capital.

Treasury Secretary Geithner said in testimony that they had enough bailout money, with about $110 billion still available and $25 billion coming in repayments. This seems to imply they expect a big check from Goldman and/or JP Morgan. At the same time, the government is taking a very different line on allowing repayment. When Goldman raised some capital recently, it was interpreted that a private capital raise would be the criteria for allowing a payback. The past few days, the rhetoric has changed to include a much bigger "national interest" review. I think the feds are going to be very reluctant to let the banks pay the TARP back for at least a while. But Time Magazine says a source at the Treasury Department confirms there is "substantial value in the banks and there are no big shocks coming." The unnamed official emphasized risk controls were too lax and need to be strengthened. I don't know that we needed to be told that.

While all this is going on, the Feds are trying to get the Public/Private Investment Program (P-PIP) to buy legacy assets from the banks. The Treasury is now accepting asset manager applications to run the P-PIP partnerships. But the TALF program (Term Asset Backed Lending Facility) is off to a miserable start. Only $5.2 billion has been subscribed to, when multiple billions were planned for. The issue to me is that the government is a lousy partner and you have to worry they will claw back profits and/or dictate what can be made. This fear raised its head again Tuesday when a special 247-page report from Neil Barofsky, special inspector general for TARP, said "Fund managers who seek to be co-owners of P-PIP investment partnerships. . .might face pay limits." It cites Treasury officials who say "investors could be subject to executive compensation limits." This is a deal killer if there ever was one. What could they be thinking of? Rational minds need to get focused on this or the rescue will be DOA.

Yet with all this noise swirling around and with mixed earnings reports (although not as bad as feared), the market did not follow yesterday's awful lead and instead chose to rally. Financials led the way with a better-than-7% advance, but industrials were the only other large group that did better than the market (telecom did as well but is not big enough to move the needle). Volume on the NYSE was again on the light side. A narrow advance on light volume is not the recipe you want. But an advance in the face of mixed to bad news is heartening, especially after yesterdays unnerving decline.

I know I sound like a broken record, but I think we saw the bottom in early March and that we will continue the testing process for a while, but that whatever low we seek (and I am hoping that 800 on the S&P will prove support and July's low of 750 will be just a memory) will be a "higher low."