Christopher Whalen’s Institutional Risk Analytics came up with his second quarter 2009 stress test results today, and the results aren’t pretty.
Whalen says that the US banking industry is still sinking steadily and neither the Obama Administration nor the Federal Reserve seem to have any more bullets to fire at the “deflation monster.” While there was some improvement in the previous quarter, we are now back to stress patterns of 2008.
With the Fed having spent all the liquidity to prop up the Street’s toxic asset waste pile, Main Street employers , private investors and smaller banks must now go begging for capital and liquidity in a market where the government is the only player left.
The notion that the Fed can even contemplate reversing the massive bailout for the OTC markets, this to restore normalcy to the monetary models that supposedly inform the central bank’s deliberations, is ridiculous in view of the capital shortfall in the banking sector and the private sector economy more generally.
Not surprisingly, Whalen rated Citi, “the queen of the zombie dance party ,” F for the quarter, down from C in the first quarter due to a deterioration in score for loan defaults.
Credit losses at C could require additional injections of capital a la Fannie Mae and Freddie Mac, even with the flow if subsidies that has increased C revenue greatly from 2008 run rates.
He also raises the question as to why serious people on the buy side are still seeing value in the doomed bank which is “halfway in the grave via the loss sharing agreement with the FDIC.
Whether or not there is value inside C is not the issue; it is just not kosher, to us, for a manager to put investment grade investors into a situation that is basically a restructuring, with the government as the largest, senior creditor – and one in which the ultimate liabilities are as yet to be quantified