Citigroup and Bank of America face the embarrassing prospect of asking the US government for fresh capital after a report said they had failed US Treasury stress tests. Bank of America and Citigroup are reported to have failed the US Treasury's stress tests. The two banks – which between them have received $90bn (£61bn) of Treasury capital plus $424bn of loan-loss guarantees – are believed to need the money to bolster their capital positions after the tests showed their balance sheets were not as strong as first thought. Although the results of the tests are not due to be published until May 4 at the earliest, the Wall Street Journal reported that both banks were in need of fresh funds. It did not quantify the amounts. – UK Telegraph
Dominant Social Theme: Shore ‘em up, please.
Free-Market Analysis: Before central banking, when money had to be dug up out of the ground, capital was relatively precious and apportioned according to commercial forces. It flowed toward market solutions and those companies that possessed them. But these days, with the ability of central banks to apportion paper and electronic capital based on preference and perceived need, one wonders about the necessity for such a stress test.
Here are some questions. Can't a central bank direct as much in the way of capital as necessary to a bank that is too big to fail? Why do these stressed banks need to raise money in the public market? Is it to prove simply that they can do so? Even then, a basic question remains: Are purchasers of an offering buying in because of the innate quality of the offering or because of a perception that the bank is too big to fail and thus will survive no matter what?
Yes, the demand that certain banks raise additional capital in the larger market is a bit strange in our opinion. However, it does occur to us that there might be a more subtle reason for such a demand, one that has less to do with business than politics. We recall, first of all, that the Obama administration informed US money center banks at a recent meeting that they could NOT return government funds – not even if they wanted to, until the government said it was OK to do so. In the meantime, he intimated, banks that had obtained taxpayers funding had to accept the inevitability of increased government interference in their affairs. How does this play into the stress test? We read the following from the above excerpted article:
The tests are based on worse-case scenarios, looking into whether institution's balance sheets would be able to withstand further major shocks to the financial system. If a bank is found to have failed the tests, it will be given six months to raise the extra capital, either through private fundraising or from the government.
What we think is going on is that the additional fund-raising if not obtained through public markets, will come not from Federal Reserve coffers but from taxpayer funds – further involving the federal government in banking practices. This is indeed a form of backdoor nationalization, and a fairly cynical one. Demand that America's biggest banks submit to a stress test, administer and interpret the results as you choose. Then provide taxpayer dollars and insist on additional control as a result. This is the recipe, apparently, that is being followed when it comes to General Motors as well.
We're not quite sure why the Obama administration has such an aching desire to nationalize America's banks, but it is becoming clearer and clearer that's the goal. Of course it couldn't happen to a more deserving bunch. The cynicism of America's banking class extends far beyond that of the American executive branch. Anyone who works at a high level in American or European finance is well aware of the central banking printing presses and how they have pulverized moral hazard while creating uncontrollable booms that provide great wealth for all involved. But now we see the darker side of this fiat money compromise. It is very pleasant when all the market indices point skyward. But the aftermath is painful indeed. The West's financial mechanism is broken and unscrupulous populists are now using the damage as a pretext to gather more – much more – power. It is true, as free-market philosopher Ludwig von Mises wrote, that socialism and capitalism cannot long abide. The bad squeezes out the good and we are left with nothing but the ruin that accompanies the endless meddling and leveling.