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Will the Stress Test Restore Confidence?

Although the government has previously said that distressed banks need to raise additional capital to meet the strict standards of the “stress tests”, the Obama administration also revealed that it is ready to provide help if the banks needed it. Performed on 19 financial firms, the stress test is intended to boost consumer confidence. It is important to take note that the 19 major firms account for half the loans in the United States banking system and it has become a big part in the government’s rescue plan.

Restoring Consumer Confidence

With today’s economic crisis, you, your friends, and your loved ones might be cutting back to save up for any unforeseen circumstance. This causes great damage to the economy if majority of Americans are doing the same thing. The government wants to stop this trend by assuring the public about the relative strength of the financial sector. Once investors and the public are assured that the country’s biggest financial firms are stable, recovery can begin at a faster pace.

The Federal Reserve has already held top-level meetings with bank executives to give them the lowdown about what the status of certain banks will be if the recession got any worse. Senior Fed officials assured the public that they will keep a close eye on banking institutions to ensure that they have sufficient capital to withstand major economic shocks. The results of the stress test will be announced on May 4. Already, its effects are being felt in a positive way. Wall Street is brimming with anticipation and the Dow Jones Industrial rose by 119 points to close at 8,076.

Criticism of the Stress Test

The concept of the stress test has garnered both praise and criticisms from economic experts. Some critics maintained that the stress test may achieve the opposite effect of what the government wanted. The uncertainty that it creates feels on market volatility. In addition, the market may not accept the hypothetical testing as a realistic one.

How the Government Will Help

The philosophy that major financial firms are “too big to fail” seems to be a fundamental one. The Fed can use several tools to improve a bank’s balance sheet including converting Treasury loans into the bank’s common shares of stocks. Another method would be to compel financial institutions to raise more capital from private market to get more money from the bailout fund. If worse comes to worse, the rescue plan may involve a government-backed merger.

What are Bank “Stress Tests”?

When you hear the words “stress test”, a treadmill, a heart monitor, and your next physical probably come to mind.  When you hear the words “stress test” in the news these days, it is actually referring to something else-tests the government is currently performing on America’s “big banks” amidst this financial crisis.

What are bank “stress tests?”

Shortly after officially taking office as President, Obama and his administration decided to perform stress tests on the nation’s struggling banks.  According to an online article published by NPR back in February, these stress tests “are a widely used method of figuring out how strong a bank’s balance sheet is – essentially using computer models based on historical data to judge how it would withstand various hypothetical situations.“  Another term used to describe the stress testing process is called “shocking” the bank’s books.

Which banks are undergoing government-imposed stress tests?

In February of 2009, the government mandated that all U.S. banks with assets of more than $100 billion would be required to undergo stress tests. This brings the grand total to 19 banks.  These tests were designed to ensure that banks could survive, and continue lending, even if the following shifts were to happen in the future:  unemployment rising to above 10 percent and home prices falling by an additional 25 percent.

Why are they being conducted?

The Treasury stated that banks will undergo these stress tests to determine whether they “have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.” All of the 19 banks being tested are expected to pass the stress test; however, some banks will be rated higher or lower than others.

Implications of making stress test results public

The White House is still deciding whether or not they will make the results of these stress tests available to the public.  Previously, all of the banks receiving bailout money had been considered equally, preventing the more deeply wounded banks from receiving any negative attention.  The Federal Reserve even announced last week that all results must be kept confidential, as financial results like this are rarely made available to the public.  Nevertheless, some within Obama’s administration believe that results need to be released to confirm the validity of the assessments to the American people.

What if a bank fails the stress test?

As citizens affected by the credit crisis on a daily basis across various aspects of life, it is important to ask yourself what you would do if the bank you bank with failed this government-imposed stress test.  According to Treasury officials, the stress test actually “won’t be “pass or fail,” but a question of what level of capital was adequate.” Either way, these “stress tests” should have little, or no affect on the way you bank.

Citi Financial Reports a Profit Post-Bailout: How? What does this mean?

For this week’s Monday’s Market Movers entry, let’s take a look at the profits Citi Financial is currently reporting.  As of this past Friday, March 13, the Dow and the S&P 500 stock indexes rose for a fourth straight day.  This rise in the stock market came shortly after Citigroup announced that it did not need any more governmental aid.  Wait a second-let’s digest this information.  So this means that following President Obama’s massive bailout plan, which aimed to ultimately restore stability to the banking industry-Citigroup is actually reporting a profit?  Following a global financial crisis, Citigroup actually has good news to report?  Let’s take a look at how Citigroup is managing to slowly climb back to the top-and what this good news ultimately means for you, the consumer.

Apparently 2009 is not looking so bleak for Citigroup.  Citigroup CEO Vikram Pandit sent a letter to employees, reporting that the company is having its best quarter since the last time it reported profits, during the summer of 2007.  During January and February of 2009, Citigroup’s operating revenue was $19 billion, $2 billion less than the 2008 full-quarter average. As mentioned above, the stock market displayed a clear reaction to this  surprisingly uplifting memo, raising Citigroup shares 38 percent.

So how is this possible amidst a financial crisis?  Well, the memo that Pandit sent to employees communicated that Citi’s deposits were “relatively stable.”  Pandit also reported that the company has conducted its own “stress test”, based on tougher criteria than what the federal government is currently using to test the nation’s 19 largest financial institutions; he concluded that he is “confident about our capital strength….client businesses are strong, our deposits are relatively stable, our client-driven securities and Banking businesses have been performing well…and we continue to provide credit to consumer and corporate customers.” Pandit further displayed his commitment to getting Citigroup back on top by agreeing to a $1 annual salary until Citi becomes profitable again.

Furthermore, on December 1, Citigroup cut all sources of online, unsecured loan applications.  This means that Citigroup has basically stopped collecting these loan applications from all websites except their own.  The number of Citi credit cards, featured on websites like, dropped from a high of 19 total cards to only 3 currently.  For consumers like you, this means that you can easily get access to credit through Citi.

So things, for the moment, are looking up for Citigroup.  As a result, things are looking up for consumers when it comes to getting access to credit.  Despite the good news, Citigroup is pushing the need for Americans to save by making smart financial decisions.  In order for both banks and individuals to climb their way out of this financial crisis, we need to change our spending habits.

Where did the Banks Spend the Bailout Money?

Obama and Geithner are now cracking down on the banks.  They are saying that in order for banks to receive more money from the bailout funds, they will have to cap their pay.  They will also be held accountable for where the money is being spent and used.

Okay, let’s back track.  What happened to the first round of funds that was distributed while the old administration was running the show?  Well, no one really knows.  As a result of the government not holding banks accountable, the funds ran out.  The public learned of these banks’ continued spending, along with the $18 billion in bonuses that these bank executives earned.

When consumers apply for a loan or a mortgage, their financial past is put under a microscope during the underwriting process.  Banks need to know details about the potential borrower’s income, any outstanding debt and financial track records.  If this is standard procedure, why aren’t banks subjected to these checks when they ask to borrow money from us??  Why can banks borrow money from public funds and not have to show where it is being used or spent?

Thankfully it looks like Obama and Geithner will not allow this lack of accountability to continue with the second round of funding.  With the first round of funding distributed,  I have not seen any evidence of credit markets opening back up.  So where exactly did the money go?  We may never know where the first round of funds were spent.  Moving forward, hopefully the public will see evidence of more transparency when it comes to detailing how the rest of the funds are being used.

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