So begins the tricky process of rolling out stress test results…
The dance starts with a leak to the WSJ. Word is that the Federal Reserve has told Citigroup (C) and Bank of America (BAC) that they’ll both need to raise billions more in order to be adequately capitalised. Neither is a huge surprise. Both have received exceptional levels of assistance already, and analysts have already said that both will need more cash.
But here’s where it gets interesting: Bank of America is expected to file a detailed appeal immediately, explaining why the Fed got it wrong.
If nothing else, this suggests that the stress test is a bit more than the PR exercise many assumed it would be.
No word on what Citi plans to do, though it supposedly wants more credit for moves its taken to shrink the company, such as the deal with Morgan Stanley and other unit sales.
Of course, the question remains: How do the two shortest midgets actually raise capital in this environment? Only the strongest of the strong seem to be able to do so, and even then it seems dicey. Our guess is that if Bank of America could easily raise cash, it wouldn’t fight tooth-and-nail to avoid it.
As Morgan Stanley said after its latest earnings: It’s a signalling thing. Showing the market that you can raise money — even if dilutive –is a real positive sign.