Tuesday, May 05, 2009

Banks rally ahead of test results

Looks like those short positions in US banks that we mentioned yesterday are a tough trade to be in right now.

FT reports that bank shares 'surged' yesterday as traders bet the upcoming stress test results will reveal better-than-expected news about the large banks' capital raising needs.

"US bank shares surged on Monday as investors bet that some of the country’s largest institutions will have to raise less capital than previously feared after this week’s release of the government’s “stress tests”.

The banks believed to have been told by regulators to shore up their balance sheets, such as Citigroup, Bank of America and Wells Fargo, led the sector higher amid investor optimism that their capital needs will be manageable."

So this latest sentiment on the banks capital raising needs is in stark contrast with the views offered up by Jim Bianco in last week's Bloomberg interview.

As noted in yesterday's post, Bianco felt that the delay of stress test results might signal worse-than-expected news on the banks' capital raising requirements.

FT reports that the government will inform the 19 participating banks about the test results and their capital requirements today; a public announcement is scheduled for Thursday.

So far, 2 of the 3 banks in question (Citi & BofA) are up in today's US trading session, while Wells Fargo is down about 4 %.

Currently making my way through an interesting piece from Naked Capitalism on how the government is managing the news of the stress test results. Any readers have some thoughts on Yves' article and how this all plays out?

Update: See related articles and posts for more on Bank of America's capital needs, plus commentary from Matthew Richardson and Nouriel Roubini on the true state of the financial industry.

Related articles and posts:

1. Tests show Bank of America has biggest capital needs - Bloomberg.

2. We can't subsidize the banks forever - Wall Street Journal.