Well, it had been much awaited for an there was a lot of anticipation about the results, but finally they were released today. What exactly? The results of the stress tests that the US government performed on the biggest American financial institutions in order to determine if they were still solvent and also how much deterioration in credit and economic conditions they could survive.
The results of the tests performed on 19 companies revealed they should get $75 billions in additional capital in order to be ready for a possible downturn. The biggest loser of course was Bank of America which was declared to be out by $33.9 billions, almost half of the amount needed by the whole system. Of course, I don’t want to brag but do you remember when I discussed how investing in Bank of America was like investing in a casino? Of course it’s ironic to see that the stock is up about 200% since that point as well, as investors now think BAC will surely survive this crisis and probably even profit from investments such as the purchase of Merrill Lynch.
With these tests, do you think that investing in financials is now the right thing to do? It’s unclear but at IntelligentSpeculator we still consider US banks to have a lot of possible downside. And in any case, we still consider that the banks have so much unknown priced in that it is very difficult to value. Playing an economic rebound? Then sectors such as technology look a lot more attractive, no doubt about it.
Even BAC, the one company that is deemed to require massive reinvestment has openly commented the results as very positive and as proof that the company is healthy and doing well. I’m not sure how needing $35 billions means that everything is well and running smoothly but I guess in a way that is exactly what Bank of America is saying.
The one thing that these results does bring is more certainty and knowledge for investors about the state of the financial sector, something the investment community had been desperately seeking for over a year now. Institutions like Citibank, Goldman Sachs, and many others are now able to point to an external report that gives a detailed analysis of their capacity to tolerate losses and thereby their capacity to sustain important losses without the fear of going under…If you liked this post, you can consider subscribing to our free newsletters here