Six banks have failed their stress tests, which is frightening when you consider that the government’s “stress scenario” was far more forgiving than those used for more rigorous stress-testing. One wonders how bad things really are.
The feds will ask the banks to increase their tangible equity by converting preferred shares to common stock, including the taxpayers’ preferred shares that were purchased with TARP funds. The WSJ editorial board called this a “backdoor nationalization.” That’s exactly what it is. It’s also a nationalization that increases taxpayer exposure to bank losses without recapitalizing the banks, without providing an exit strategy, and without building in effective safeguards against politically directed lending. One hundred days, one hundred mistakes — but none bigger than Obama’s failure to deal realistically with the banking crisis.