The true dimensions of the US credit crisis will become much clearer with the release of results from unprecedented government "stress tests" of the nation's 19 largest banks and their capital needs. The results are expected to show that the 19 banks must raise possibly $150 billion or more in fresh capital, with investors expected to punish stocks of the neediest banks.
"Most banks will have to raise capital in some form," said FBR Capital Markets managing director Paul Miller. "The capital raises will be much bigger than people think." Uncertainty about what the tests might reveal had made banks stocks "uninvestable" at this point, he added. "You just don't know how the government is going to view it."
Public release of the stress test results is set for Thursday, a government official said. A source told Reuters US officials plan to brief thee banks themselves on Tuesday. The stress tests have transfixed markets for weeks, shaping a suspenseful episode in the ongoing financial crisis that has worsened the US recession and shaken economies world-wide, burdening the newly arrived Obama administration and Congress.
It stems from hundreds of billions of dollars in shaky assets on banks' books. Accumulated during a massive debt bubble, when real estate soared and exotic debt securities multiplied, these assets are now clogging credit markets. "I can't think of a time since I've been watching banks when there's been so much uncertainty about the true value of a key set of assets," said Douglas Elliott, a fellow at the Brookings Institution, a Washington think tank. He estimates the 19 banks must raise between $100 billion and $150 billion.