Stress Tests

The point of these stress tests seems to have been to put the government's imprimateur on the financial strength of major US banks to enable them to raise DEBT in the public market without government backing. Theoretically, doing stress tests AFTER a major recession has hit is rather dumb. After all, reserves are designed to be used in recessions, not created. In recessions one wants banks to have already been strong enough to survive and lend. For example, even a AAA entity will certainly look worse financially in a severe economic trough than it did before the downturn.

But Timmy and presumably Ben wanted to reassure lenders TO BANKS [sic] that the banks are strong and even in a further leg down can survive. This is because they want to extract the government from the position of guaranteeing bank debt, money markets, and on and on. This makes sense, but of course we all know now that prior accounting rules, regulations and capital rules did not look to the future, but to the past. Banks could go to the market's casinos to play and trade and try to pad the pay of their internal hogs.

Hence the stress tests were done and we now "know" that some are fine and some need capital in the form of common equity. I think this crisis also puts the lie to preferred stock as core equity (whatever you call it) for a bank. The point is that cutting a preferred stock's dividend would be a sign that bank is likely insolvent, while cutting the dividend on common stock is not seem that way: it can be seem as bolstering current operations.

So in the future, I'd think government regulations will force banks to hold much more capital as common stock and cut back on preferred stock. By the way, in the 1990 recession, Elmer decided that preferred stock was a great source of capital for banks. Sighhhh.

For investors, all else being equal, this means lower growth rates for banks as the common equity base will be larger. What banks need to do is cut the pay of huge numbers of their bankers, particularly traders, who really make money using and risking the stockholders' money. Stockholders much be better compensated for the risks they bear.

Markets

A minor dip yesterday, but this morning futures are up. I really want a good sized pullback, preferably a lot more than a one day wonder. I'd like a good two week, three wave A-B-C pullback to some support level or some Fibonacci level. I want to get back to 150% long at a point of lower risk.

To accomplish this, I have cast my best market drop voodoo spells:
1. I publicly ( and honestly) proclaimed the recession is over - a very bullish call.
2. I bought a fine new car - an SUV really. Very decadent, but Mrs. B wanted it.

This should infuriate the market gods and cause a sizable pullback. I await it with plenty of skim to invest. I guess this will also test whether the market gods read this blog ;) If they do, they will propel the market much higher to frustrate me.

Word of the Day

"Subserve" - verb, transitive [$10]
Subserve means 1. to serve as an instrument or means of; 2. to promote the welfare or purposes of.
Sentence: Timmy's stress tests subserved the governments desire to extricate itself from extensive bank debt guarantees.

Le Mot du Jour

"Sommer" - verb, regular -er conjugation.
Sommer means (transitive) to command or enjoin [~ qn de faire qch -> to command or enjoin somebody to do something]; (intransitive) to add.
La Phrase: (adapted from Le Monde) L'administration d'Obama somme quelques grandes banques se renforcer leur capital.
Sentence: The Obama administration is commanding some large banks to strengthen their capital.