Mad Scramble To Spin Today's Stress Test Leak

It’s not good news that Bank of America (BAC) and Citigroup (C) have been told to raise more capital following the completion of the Fed’s stress tests.

The thing is, the stress test isn’t even that stressful, so if they’re being told to raise more cash under this scenario, how much more would they need under realistic worse-case conditions?

But the defenders are all out with the same line: Well, gee, everyone knew they needed more cash, how can this be a surprise to anyone?

The big problem with that reasoning is that shares of Bank of America and Citi are both off today. So it’s kind of hard to be arguing that the news was already priced in when the news is moving the shares so much.

And there’s the problem of the banks denying the stress test’s conclusions and filing an appeal. So it’s as though everyone knew they needed more capital… everyone except shareholders and banking CEOs. Not quite everyone is it?

What a nightmare. The banking system burns while Ken Lewis, Vikram Pandit and Ben Bernanke go mano-a-mano-a-mano debating stress test outcomes and who’s Monte Carlo simulations are more realistic.

Meanwhile, the other mindblowing item from this morning’s Journal report — besides the headline about needing more capital — is that the banks really do believe their own hype:

One question is how the government is projecting banks’ revenue streams through 2010. Some bankers are optimistic that the Fed will use their first-quarter numbers to predict their performance for the next two years.

That could inflate the banks’ earning potentials — and thus their capital cushions — because many of the companies had strong first-quarter performances.

Analysts, investors and most executives say those results probably aren’t sustainable.


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