It was predicted in this space just two weeks ago: “Obama to coddle bankers.” Now we’ve got official confirmation of this from one of the prime coddle-ees: Citigroup. An analysis of the Treasury’s plan produced by two Citi analysts, Ryan O’Connell and Jerry Dorost, begins with this headline:
New Treasury Stress Test Guidelines Do Not Appear Onerous
and continues in this vein. The plan is “bank-friendly and investor-friendly.” The goal is to increase bank capital “while minimizing the amount and duration of any government’s direct ownership of common stock.”
The stress tests aren’t very stresssful, either: neither “onerous or draconian.” That is, the economic parameters for the “more adverse” scenario are not much worse than the consensus forecast for what the economy is likely to do over the next year. The baseline is for –2.0% GDP growth this year and +2.1% in 2010; an unemployment rate of 8.4% this year and 8.8% next; and another 18% decline in house prices. The “adverse” alternative is for –3.3% on GDP this year and +0.5% next year; unemployment of 8.9% in 2009 and 10.3% in 2010; and another 29% decline in house prices. To me, the baseline looks optimistic, and the adverse, slightly on the dark side of realistic.
And the gov will be very indulgent if banks look “stressed,” even by these friendly criteria. Banks will be given six months to raise private capital (good luck with that, guys!). If they fail, the Treasury will buy preferred stock, which can be converted into common at a 10% discount to the stock price on February 9. The choice of date looks to be no accident; as the Citi analysts comment, “This provision appears intended to reduce the potential dilution to equity holders, since banks’ stock prices were generally higher at that time.” (Using a lower price would give the government a bigger share at the expense of existing stockholders.) To take a nonrandom example, Citigroup’s stock closed at 3.95 on February 9; as this is posted, it’s 2.51, 36% lower. (Current quote).
To use the Japan vs. Sweden model that Obama himself used, this is a lot closer to Japan than Sweden. Anything but nationalization!