Reading the stress-test leaks

By Felix Salmon
May 4, 2009

Trying to do a stress test on a trillion-dollar bank is such a major undertaking that it can’t really be kept completely secret. So it’s hardly surprising that some stress-test results seem to be leaking:

Citi, which has already been bailed out three times by the authorities, could need an extra $10bn or more if the economy worsens. BofA, which has had $45bn in government aid, was found to need well in excess of $10bn, people familiar with the matter said.

Regional lenders Wells Fargo and PNC Financial were also among the banks that would need to raise more capital unless they could persuade the authorities their findings were wrong, said people close to the situation.

But it’s a bit rash to take anything to do with the stress tests, including this report, at face value. A couple of questions spring to mind:

  • Stress test results are material non-public information, so who would be so foolish as to leak these things — especially when the leaks seem to be coordinated in a tactical manner? (The WSJ and the NYT had almost identical stories on Saturday saying that Citi would need to raise $10 billion, both citing completely anonymous sources.)
  • Why is Bank of America now officially denying the FT story? How can it possibly be a good idea to deny that you’re looking at ways to raise capital, especially when you don’t have the official results of the stress test yet, and there’s a good chance that you will have to raise capital after all?

There’s clearly a huge amount of pretty agitated negotiations going on just out of view right now, in a game where we, the newspaper-reading public, only get to see a few ripples on the surface. The newspaper stories might be a way for Treasury to “anchor” expectations: now that the $10 billion number is ingrained in the public mind, the banks will know that anything much lower than that will seem insufficient, and therefore it’s now easier to persuade them that they have to raise that sort of money. Alternatively, there could be another explanation entirely. With no indication in the newspaper stories as to who is leaking these stories and why, it’s best to take them all with a very large grain of salt.

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