Now that the bank stress tests are over the firms that were examined and found to need more capital have been able to go about the business of raising it. Part of their projections of how much money they will require is calculated based on each bank’s projections of its future earnings.
The Federal Reserve thinks that the banks are painting a picture of a future that will never come.
According to The Wall Street Journal, “The Fed initially said the 10 banks ordered to raise a combined $74.6 billion would be allowed to essentially count $215.3 billion in revenue toward their estimated losses through the end of next year.” Now the agency has changed it mind.
Why the future earnings were given so much weight in the first place is a mystery. Most large banks will face several more quarters of losses. JPMorgan (JPM) recently said that credit card default rates at its WaMu division could hit 24%. Many financial firms have portfolios of commercial real estate loans that are likely to be troubled. There is no guarantee that the process of writing off toxic assets is done.
The stress tests results were taken too lightly. American banks are likely to find out that the money the government has forced them to raise is not nearly enough.
Douglas A. McIntyre
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