Is Government Intervention Good For Stocks?

Has government involvement in the financial sector been beneficial to the largest U.S. banks? After the completion of the government’s bank stress tests, results showed that 10 out of the nation’s 19 largest banks need to raise ~$75 billion in capital to become more solvent. ~$34 billion of that capital raising falls on Bank of America . Other banks, such as American Express and Goldman Sachs which were given a bank-holding status in November 2008 in order to become a beneficiary of TARP funding, have no additional capital raising requirements.

An index by the NasdaqOMX Group was introduced as the Government Relief Index to track TARP recipients including 89% of the 19 stress test banks (the index excludes MetLife and GMAC). The Government Relief Index reached its highest level yesterday (5/7) since it was first launched on January 5th 2009, touching an intraday high of 1032.2, only to close at 925.05. It is up about 34.5% in the last three months, which may be a good indication that a recovery is foreseeable for the nation’s largest banks.

Has government intervention has been helpful to the stocks of the U.S. biggest banks? Some of the 19 largest banks have seen hefty gains since December 19, 2008 when $350 billion in TARP funds had been fully allocated across the major banks, with Morgan Stanley and Goldman Sachs amongst the top winners as their shares have gained 75.7% and 65.7% respectively as of Tuesday’s close. Only one third (6 of the 18 publically traded stress test banks) are up since December.