As the US government goes though the process of stress testing banks, it may want to be instructed by the lesson of RBS (RBS) which managed to loss $34 billion last year. The UK government picked up the privilege of insuring $462 billion in assets in the process.
Since the UK government owns 70% of RBS, the numbers should not have come as a surprise, but for traders they clearly were. The intervention by the central bank helped drive RBS shares up despite its trouble.
As RBS shows, stress testing US banks may work against the government’s desire not to nationalize them. The skeletons in the basements of the largest financial firms in America may not be unlike those at RBS. If a careful look at Citigroup (C) or Bank of America (BAC) turn up write-offs that could run into the hundreds of millions of dollars, how many choices do the Fed and Treasury have? Only two. Liquidate the bank and sell its assets to other financial firms, or take ownership of the bank and “merge” its balance sheet with the Treasury’s.
The troubles at RBS are telling. Terrible problems at big banks are not over, and an “early warning” system may not catch all of them.
Douglas A. McIntyre
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