Banks' stress test does not erase all financial concerns

Special Report: Global Financial Crisis

by Yang Lei, Chen Gang

NEW YORK, May 7 (Xinhua) -- Some investors said the result of the U.S. government's stress tests on major financial institutions does not erase all concerns about the U.S. financial system.

"We still need to be worried about banks," Teddy Weisberg, a trader told Xinhua at the New York Stocks Exchange on Thursday.

"Clearly if we have learned anything well from the past 18 months, I think we learned that we need to be a little cautious and a little worried about a lot of things," he said.

U.S. regulators on Thursday unveiled the long-waited result of the stress tests and urged 10 of the nation's 19 largest banks to raise about 75 billion U.S. dollars in new capital to withstand future losses if the recession worsened.

Among the institutions needing more money, the Bank of America needs to raise 33.9 billion dollars in capital; Wells Forgo, 13.7 billion dollars; and the auto and mortgage lender, GMAC LLC, 11.5 billion dollars.

"We certainly saw with the release of first quarter earnings from the banks that, on the operating basis, clearly with the favorable yield curve, they had no problems making money," Weisberg said.

"But the issue continues to be the toxic waste, or the bad assets, on their books. I don't think the stress tests address these bad assets that continue to be on the books of banks," he said.

Weisberg said although the results of the tests showed the banks need additional money in the worst case scenario, "unfortunately, it is a scenario, and one of the problems with creating the scenario is that now we have this bogy that everybody is going to look at."

"If the economy does not get better or gets worse, a lot worse than we expect, then we have created a whole new set of problems," he said.

The tests found that total credit losses for the 19 banks may reach 600 billion dollars in 2009 and 2010. If the economy performs as badly as the worst case scenario assumed in the tests, the losses of the banks could amount to 950 billion dollars from mid-2007 through 2010.

However, Nouriel Roubini, the NYU Stern School of Business professor, said the stress tests for the 9 major banks were not "stressful enough."

"Even with the recent economic news, the stress tests were not worst case scenarios. In fact, for some of the components, like unemployment, the reality is actually already worse than the more adverse scenario in the tests," Roubini, also known as "Dr Doom," told CNBC.

He said the unemployment rate in this year's fall may be already higher than the one assumed in the more adverse scenarios of the tests for 2010.

The International Monetary Fund (IMF) has doubled estimates of aggregate losses for loans and corresponding securities to 2.7 trillion dollars in its latest global financial review.

"These estimates put the financial system on the brink because the financial sector holds half of the losses. Since the 19 largest banks own the vast majority of assets, it therefore follows that they must also be holding the losses," Roubini said.

"Each bank clearly had the incentive to sugarcoat their expected losses to regulators. Nothing good could come from aggressively marking down their books. So while the losses are calibrated to be consistent across all 19 banks, the overall level of the losses will be downward biased.

"This explains why the stress tests don't completely jive with either the market estimates or the stock market drops," he said.

U.S. regulators gave the banks, found to be in need, to raise more capital and one month to come up with a plan. The banks will have until June 8 to develop a detailed capital plan, and until November 9 to implement it.

"The financial sector has been and will continue to be the most important part of the U.S. economy. It was certainly the area that had the most problems, which created most problems for the U.S. economy and the stock market," Weisberg said.

"So, far beyond the results of the stress tests, the financial sector, the big money banks in particular, will continue to be very much in focus for investors and traders for many, many months if not years to come," he said.