Thursday, May 7, 2009

Relief from the Banks Stress Tests Results

After several months of waiting to see what would be the capital needs of 19 of the biggest banks in the US, the department of treasury provided a lot of information and if seems to me that they are a lot better than what has been expected by most investors and traders.

Since March, there has been a massive rally in stocks that has been triggered by internal memos at JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C) that they had been profitable for the first two months of 2008. Those announcements revealed to be a source a major relief among many traders, even with the possibility of nationalization that was looming over most of them.

The goos news now is that those banks will not need more capital injection from the US government, but a couple of them will have to issue common shares to fulfill their needs for more Tier 1 capital. Those needs have been calculated by the treasury department assuming jobless rates rises above 10% and that home prices continue to tumble. The Washington Post came out with a very interesting article explaining the results of those stress tests that can be accessed here.

One thing is for sure, investors will probably feel more confident since banks like Bank of America Corporation (NYSE: BAC), Citigroup Inc. (NYSE: C) and JPMorgan Chase and Co. (NYSE: JPM) have seen major gains in their stock prices in afterhours trading on May 7th. What is left to see is how that market will react to those announcements on May 8th, even if some of the results have been leaked at the beginning of the week.

Full Disclosure: The author does not have a position in BAC, C or JPM.

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