2009-05-08wsj.com

The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.

Bargaining? There was bargaining in financial stress tests???

Ok, we aren't surprised by this at all, as it simply means the whole process was as cronyist and as politicized as we knew it would be (since a market-based approach was being rejected out of hand -- remember the admission that "no one would fail the stress tests"?)

It would be really nice to see what would happen if the banks were forced to run their own "stress tests", and then attempt to raise capital in the private markets based on their results. It would be self-correcting: if the estimates were unrealistic, the offerings would go poorly. If they were conservative, the offerings would go well.

But amidst this sort of government meddling, you get a different effect:

Banks pressed ahead on Friday with plans to fill their capital holes by tapping public markets. Wells Fargo raised $7.5 billion in stock through a public offering. The bank originally planned to raise $6 billion, but expanded the offering, which was valued at $22 a share, due to robust demand. Shares of Wells Fargo rallied $3.42, or 14% to $28.18.

Because the market reads Well's numbers as having, in effect, an "official stamp" of the government, why wouldn't there be robust demand? They're too big to fail, after all, at least beyond the need for $13B. Now if the government's numbers are proven wrong, they will be able to make a (disingenuous) case that taxpayers should keep the bank going beyond that level.

Taxpayers, one again thank yourselves for your future generosity.


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