The Bloomberg video below makes it seem that Whitney believes the stress tests are a sham. She says the tests are a theoretical exercise whereby banks ask: “what will our earnings power be in two years after we sell off these ‘toxic’ assets?” She goes on to suggest that the answer to this question will be a self-serving, upbeat response not wholly reflective of the real dangers lurking.
In reality, much more capital is still going to be required. Some of this will happen via asset sales, as she suggests. However, one should anticipate a real need for yet more capital still.
You should also note she says the regionals will struggle because they have A LOT of commercial property (CRE) exposure – something I mentioned quite often in 2008. Case in point is Zions, which had a horrendous earnings announcement just yesterday.
“Zions’ capital position will come under significant pressure in the short-term because of its large commercial real estate lending concentration and collateralized debt obligation portfolio,” Moody’s said. “Future credit costs in Zions’ residential construction book and CDO portfolio cause a significant risk of the firm becoming undercapitalized.”
The long and short is: it is good to be a “too big to fail” big bank. It is not so good to be a regional or local bank.