Now that the stress tests for banks are coming to a close, where do exchange traded funds (ETFs) go after the results are made public on May 4?
“Stress test” results are due out to the public early next month to determine how much capital certain banks would need to withstand the recession. Banks under scrutiny with weak balance sheets include Citigroup Inc, Wells Fargo & Co (WFC), Bank of America (BAC), MetLife (MET) and GMAC, reports Karey Wutkowski and Patrick Rucker for Reuters.
The Federal Reserve, incidentally, tested regional banks harder than the industry titans, Daniel Wagner for the Associated Press reports. The tests rated individual loans held by large regional banks as riskier than the complex troubled assets held by large banks. This has some worried that it could threaten regional banks, while making the big ones appear to be better off than they are.
Wayne Abernathy, a former Treasury Department official, points out that regional banks’ portfolios are down about 5% so far, while complex securities have seen their values drop between 30% and 40%.
The Obama administration is hoping that the suspension of interest payments for large, distressed banks on Federal aid will help the establishments rebuild capital reserves faster and cut the need for more aid. Binyamin Applebaum for The Washington Post reports that the government initially required aid recipients to issue preferred stock that paid interest of 5% a year.
Instead, it would allow firms to replace those shares with common stock rather than government-held shares. The exchanges also would give the government significant ownership stakes in the banks that participate. The taxpayer would be left unsupported, only to profit if the company’s stocks increase.
Obama also wants Congress to give the government the ability to take control of large, interconnected financial firms to wind them down. The FDIC would also be able to step in and buy a stake in the firm, assume obligations, take a lien on the firm’s assets, or sell off the firm’s assets, if a troubled bank were to accept loans from them.
Although recent earnings reports indicated a slight rally for the financial sector, the credit markets are a whole other story and the industry will need some time before a solid turnaround can begin.
In a side note, New York Attorney General Andrew Cuomo said government officials pressured Bank of America’s CEO Ken Lewis to complete the bank’s purchase of Merrill Lynch and threatened his job security, reports Ieva M. Augstums for the Associated Press.
- Financial Select Sector SPDR (XLF): down 18.4% year-to-date