Who Will Flunk the "Stress Test?"

Who will fail the “stress test?”

Good question. The Obama administration will soon be checking a number of the country’s largest banks which have received some of the $700 billion federal bailout money.

The feds want to know whether the banks have sufficient capital and enough different types to sustain any more economic blasts. Another goal is to assess whether the banks can use extra public money to start lending to customers again and help move the country out of recession.

Federal Reserve Chief Ben Bernanke insists that a bank can’t “pass” or “fail” the stress test. Rather, it’s a kind of “Come to Jesus” moment to see just how healthy the banks are.

And, it’s an effort to tear past a veil of secrecy that banks have deployed even after they have gotten public bailouts. Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program, told a House subcommittee yesterday that a mere 5 percent of banks that have gotten bailouts have bothered to respond to a federal request for information about how they have spent the money. That’s right. An incredibly tiny 5 percent. Old attitudes do die hard.

Who’s the most likely not to succeed the stress test? Financial blogger Peter Cohan says the three likeliest candidates are the ones with the lowest stock prices. They are Citigroup, Bank of America and Cincinnati’s Fifth Third bank. Here are his reasons:

• Citi was trading at around $2.35 a share this morning and is in such bad shape that it is talking about converting $45 billion in preferred stock into common stock that the feds would own. Some would call that nationalization.
• Bank of America was trading at around $4.37 a share and has suffered quite a fall after Chief Kenneth Lewis took over both Countrywide Financial and Merrill Lynch. Those entities are swollen with toxic assets.
• Fifth Third trades at about a buck and a quarter, lost $2 billion last year and has received $3.4 billion in TARP money.

These banks do seem to be in the worst shape but there’s plenty of woe to go around. Bank stocks are steadily getting hammered by Treasury Secretary Timothy Geithner’s so far confusing and vague rescue plans and fears that nationalization will make toast of shareholders. Some of the stronger big banks are hurting. JPMorgan Chase has seen about $2 billion in its market cap disappear. Atlanta’s SunTrust saw $147 million of its value go away. PNC Financial of Pittsburgh was seen its stock drop of a lofty $80 a share in September to the mid $20s now.

The stress test, however, does make sense as examples of rescues in other countries show. Sweden performed similar triage on its banks during its crisis nearly 20 years ago. By identifying troubled banks, the Stockholm government was able to move fast to rescue its financial system  Japan failed to do it until it was way too late and paid a huge price.