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Back to shorting banks...

Short sales of US bank shares have increased noticeably in recent weeks ahead of the government's "stress test" results, which are scheduled for a delayed May 7 release.

Bloomberg has the details in, "Short selling of banks accelerates":

"Short sellers, the bane of Wall Street executives last year, are back.

The number of Citigroup Inc. shares borrowed and sold short increased sixfold since Feb. 27, the day the U.S. Treasury announced it would convert some of its preferred shares in the New York-based bank into common stock.

Short interest in Bank of America Corp., MetLife Inc. and American Express Co. climbed more than 40 percent in the same period, according to data compiled by Bloomberg. In total, short sales of the 18 publicly traded financial companies undergoing government stress tests were twice as high on April 15 as they were at their peak last year in July, two months before Lehman Brothers Holdings Inc. collapsed.

“People are either positioning themselves for the potential of a preferred-to-common conversion, or they have an increased perception of risk in these companies,” said Andrew Baker, an equity strategist at Jefferies & Co. in New York."

Last week Jim Bianco spoke with Bloomberg TV about the delay of stress test results, saying that investors would be correct to assume that delays mean "the news is not good". He added that the stress test results might reveal that surprisingly large "TARP-like numbers" are needed to further recapitalize "stressed" banks for an economic downturn.

Meanwhile, Warren Buffett and Charlie Munger have criticized the stress tests for 19 large US banks, saying that most are not "too big to fail" and could easily be wound down with help from the FDIC. The two added upbeat opinions on some of Berkshire Hathaway's own financial holdings, including Wells Fargo (WFC).

Bloomberg, quoting analysts at CreditInsight, reported that Wells Fargo and some of its smaller rivals may have to turn their preferred shares into common stock as a result of the stress tests.

Related articles and posts:

1. Investors seem resigned to Bank USA - Wall Street Journal.

2. More banks will need capital - Wall Street Journal.

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