The long-awaited "Stress Test" for banks is complete and the prognosis is in. We'll spare you the 38-page report of unintelligible Fed-speak and skip to the bottom line, i.e.: If the recession worsens, 10 out of the nation's 19 biggest banks will have to raise $75 billion to cover their debts, the bulk of which involves Bank of America Corp. and Wells Fargo.
No worries, say the usual experts. $75 billion is a drop in the bond/stock-selling bucket.
Or is it?
Fact is, money goes a lot less far these days for investors in financial shares. Bank of America stock is 74% in the hole, while Citibank stock has plunged more than 90% in the last two years. Not to mention the Stress Test's other finding: In 2009 and 2010, losses at the top 19 banks could reach anywhere between $600 -to- $950 billion. With the TARP stimulus already spent, this means more intervention/interference from the government.
And doesn't all of that say what we already knew? Finding out now that the financial sector is one good sneeze away from shattering the thin ice it's skating on is like finding out a quadruple bypass patient has a weak heart.
What about the "stress test" BEFORE the stress test? The pre-emptive diagnosis beforethe post-operative one; the physical exam that warned of banks impending crisis long before any obvious signs of weakness appeared to the public? Where was that when the market needed it?
As far as the usual suspects are concerned, there was no way to anticipate the depth and degree of decline in the U.S. banking sector. “We obviously cannot predict market movements or other unforeseeable events that may affect our business,” explained the former Citigroup Chief Executive back in October 2007.
We couldn't DIS-agree more. Elliott Wave International's team of expert analysts detected the underlying weakness in financials even as the mainstream experts saw the industry as the picture of bullish health. Here, the following catalogue of E.W.I. publications speaks volumes:
In the 2004 addendum to his best-selling book “Conquer The Crash,” Bob Prechter revealed five major conditions that “pose a danger” to many banks. Among them:
“Low liquidity levels, dangerous exposure to leveraged derivatives, the inflated value of the property that borrowers have put up as collateral on loans, and the substantial size of the mortgages that their clients hold compared both to those property values and to the clients potential inability to pay under adverse circumstances.”
Bob also wrote:
"Banks almost never borrow from the Fed. Whether they will do so more in the coming years under duress is another question."
Soon after, the September 2005 Elliott Wave Financial Forecast stepped in with this urgent message:
“Banks seem to be blind to the danger of overpriced collateral as they continue to stuff their balance sheets with mortgage-backed assets… Lenders are still behind the curve, but once they see the writing on the wall, the rug will get pulled out from under the economy in a hurry.”
In the January 2007 Elliott Wave Financial Forecast, the point of no return had been reached. “2007,” we wrote. This would be “The Year of the Financial Flameout.”