The 19 - bank stress tests in the US are unconvincing and predictable. While the intent might have been laudable, the heavy back room politicking that triggered the abandonment of mark-to-market accounting weeks beforehand, laid the groundwork for an equally creative outcome of the tests. SAW remains wary – there’s still the weak state of the commercial real estate market, the default rates of prime mortgages, the true extent of the reset of Option ARMs and a potentially major credit card default. The latter if it materializes, would dwarf the combined capitalization of some well known credit card issuers.
So…..what are price earning ratios on banks worth these days? As we wait for the next shoe to drop, the tension in the bank balance sheets is between retained earnings and writedowns.
And guess which one is going to win? Yeah, the writedowns, since retained earnings will drop as current earnings shrivel. It's a little premature to point out "green shoots" or to claim that the financial system is "healing" (per Tim Geithner).
© 2009 Sanjeev Aaron Williams All Rights Reserved
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