On Thursday, May 7th, 2009, the U.S Federal Reserve FINALLY unveiled its long-awaited, eagerly-anticipated 'Stress Test' (i.e: the Supervisory Capital Assessment Program) results performed on the country's 19 largest financial institutions. These 19 banks each hold assets of at least $100 Billion and, collectively, are believed to represent about 2/3 of the total assets contained in the entire U.S. Banking system.Of the 19 U.S. commercial banks tested, 10 banks FAILED and will now need to raise a total of about $75 Billion in additional capital by November of this year. The 3 largest Bank Stress Test LOSERS are: Bank of America/BAC (needs to raise $33.9 Billion in capital), Wells Fargo/WFC (needs to raise $13.7 Billion), and the former wholly-owned financial services arm of General Motors (GM), GMAC/GJM (needs to raise $11.5 Billion).
One of the Treasury's primary litmus tests for the stress tests it conducted revolved around an interesting accounting metric known as Tangible Common Equity or TCE. Tangible Common Equity is designed to indicate how much 'ownership equity' owners of common stock would actually receive in the event of a company's forced liquidation. According to Wikinvest, TCE intends to remove the more subjective components of valuation (intangible assets and goodwill) from the calculation of a company's underlying worth. The accounting formula for the TCE ratio is a company's Total Shareholders Equity MINUS its Intangible Assets (non-physical assets on a company's balance sheet - exp's include: intellectual property, brand recognition), Goodwill (the premium paid by an acquiring company over and above the acquired company's Tangible Book Value) and Preferred Stock as a percentage of Tangible Assets. During the stress tests, the U.S. government made it clear that it strongly urges all 19 commercial banks to maintain a TCE of at least 4% moving forward.
Due to uncertainty regarding the future macroeconomic environment, the Federal Reserve tested the TCE of each of the 19 banks under 2 different economic scenarios - 1.) 'Average Baseline' and 2.) 'Alternative More Adverse'. Per the above chart, the more optimistic 'Average Baseline' case carried the following assumptions for 2009: -2% GDP 'growth', 8.4% unemployment and a 14% decrease in nationwide housing prices. Meanwhile, the 2009 assumptions used by the more pessimistic 'Alternative More Adverse' view were: -3.3% GDP 'growth', 8.9% unemployment and a 22% decline in housing values.
Lastly, it should most certainly be noted that the April's U.S. jobs/payrolls report was released this past Friday and the country's unemployment rate currently stands at 8.9% - already exactly matching the more pessimistic unemployment assumption used in the 'Alternative More Adverse' scenario. According to Dean Baker of the American Prospect, a healthier or more realistic assumption for the country's unemployment rate in 2009 would be 9.4%. It should also be noted that per the above S+P Case/Schiller nationwide 10 city housing prices index graph, the current real decline in 2009 housing prices has also ALREADY virtually matched the housing assumption used in the 'Alternative More Adverse' scenario. Furthermore, most 'experts' believe housing prices will continue to decline in 2009 and probably finish the year down by about 24-25%. As a result and anecdotally thinking, it looks like the assumptions used by the Federal Reserve in their 'Average Baseline' scenario are entirely too optimistic (14% decline in housing??) and disingenuous at best. Meanwhile, the assumptions employed in the 'Alternative More Adverse' scenario don't seem to be pessimistic enough unless the U.S. economy rebounds sometime during the 2nd half of 2009.
marketwatch.com/news/story/Stress-tests-see-possible-600/
http://www.wikinvest.com/metric/Tangible_Common_Equity_(TCE)
prospect.org/csnc/blogs/name=background_on_the_stress_tests
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BANK Stress Test RESULTS - Scorecard :
10 Banks That FAILED (Ticker) - Capital Needed :
* Bank Of America (BAC) - $33.9 Billion
* Wells Fargo (WFC) - $13.7 Billion
* GMAC (GJM) - $11.5 Billion
* Citigroup (C) - $5.5 Billion
* Regions Financial (RF) - $2.5 Billion
* Suntrust Financial (STI) - $2.2 Billion
* Morgan Stanley (MS) - $1.8 Billion
* Keycorp (KEY) - $1.8 Billion
* Fifth Third Financial (FITB) - $1.1 Billion
* PNC Financial (PNC) - $0.6 Billion
9 Banks That PASSED (Ticker):
* Goldman Sachs (GS)
* JP Morgan (JPM)
* US Bancorp (USB)
* Metlife (MET)
* American Express (AXP)
* Bank Of New York Mellon (BK)
* State Street (STT)
* Capital One Financial (COF)
* BB&T Corp (BBT)
http://www.cnbc.com/id/30626465/
Data Courtesy: Marketwatch, CNBC + The American Prospect
Full Disclosure: I own shares of GS.
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