Stress Test for the Banks

A stress test in health terms is when a person is placed on a walking machine in order to place a little stress on one's heart, and then they monitor how the heart responds.

Now the government is planning to test the heart of the banking system. Bravo. But if they don't like what they see, it is likely that they will clam up and claim "medical secrecy" for the banks. Otherwise, their stock will plunge, and they will be cast into the sea as a burning mountain.

Today's AOL financial news has an article by Peter Cohen, which reads:

It doesn't take a genius to figure out which three banks are most likely to fail that test (which is a good thing because I am not one). The stock market is already giving you the answer -- just look at the banks with the lowest stock prices that have taken TARP money. This leads you to these three banks:

• Citigroup (NYSE: C) is at $2.17 and is in talks to convert $45 billion in preferred stock into a 40% stake in its common -- and that's before the stress test.
• Bank of America (NYSE: BAC) is at $3.99 and is taking a beating in the stock market thanks to its bets on damaged goods -- Merrill Lynch and Countrywide.
• Fifth Third (NASDAQ: FITB) is at $1.26, losing $2 billion in 2008; it received $3.4 billion in TARP and is considered uninvestable until after its stress test.

The first two are probably going to be considered too big to fail. But I am less sure that the same can be said for the last one.

I have no doubt that the government stress test will not include data regarding all the "toxic derivatives" that they own. It will only include their "toxic mortgages," because that is the only possible way that they might avoid an immediate trip to the morgue.

Does anyone smell embalming fluid?