The market seems to only care about how much tangible common equity(TCE) that the government will require the banks to have, believing that whatever that number is, will be sufficient to ride out the rest of the recession.  Bloomberg reports today that:

“Officials favor tangible common equity equal of about 4 percent of a bank’s assets, up from a 3 percent goal earlier in the process, two people with knowledge of the deliberations said last week”

Below, we show Rolfe Winkler’s calculations of big bank TCE’s as of March 31:

As can be seen, if the TCE is required to be 4% rather than 3%, then Winkler’s numbers indicate that JP Morgan Chase and US Bancorp will also have to increase TCE.  We have previously posted on FASB’s new requirments to bring off balancesheet assets back onto the balance sheets next year. Once those assets are included in the TCE calculations, none of the banks listed will have TCE of 4%.  Lately, much has been written indicating that Citigroup has been asked to raise another $10B in capital.  Using Winkler’s numbers, Citigroup would need to have 4% of $1732B in assets or $69B in TCE.  Even accepting their own stated TCE of $30B (rather than Winkler’s $24B), Citigroup would need to raise TCE by $39B – not just $10B and common equity would need to be diluted by 2.5 to 1.  Is that already discounted into Citigroup’s stock?  What about FASB’s new requirement?  Further Mark Sunshine argues that TCE of 4% was insufficient in the S&L crisis, so why should it be sufficient in this, more extreme, crisis?  As we said before, the market’s is accepting the FED’s word as gospel here, but for how long?

WSJ reports that “people familiar with the matter” are suggesting Citigroup may need to raise as much as $10 billion in new capital:

“The bank, like many others, is negotiating with the Federal Reserve and may need less if regulators accept the bank’s arguments about its financial health, these people said.  In a best-case scenario, Citigroup could wind up having a roughly $500 million cushion above what the government is requiring.”

What -that’s all?  This report has been picked up by every major news supplier in the world. Just Google the terms “Citigroup may need $10B more capital” to see all the links…  Swamp Report believes this is another intentional leak by the government to prepare the market for the stress test results.  “In a best case scenario”… Ha!   Citgroup’s wants us to believe they are fighting tooth and nail to keep from having to raise a lousy $10B.  “Only please, please, please, Brer Fox, please don’t throw me into that briar patch.” The government’s approach seems to be  reverse psychology: seed the idea that if $10B is all Citigroup needs then the CNBC cheerleaders are right – the banking problems are behind us.  The government is really into manipulating by signaling.  The AP dutifully reports and translates the government’s “signals”:

“Last week, Fed officials said all 19 banks that underwent the stress tests will need to keep extra capital on hand beyond what’s now required in case losses on loans and other assets continue to climb. That was a signal some banks would have to raise more cash. Initial results indicated that both Citigroup and Bank of America Corp. would be among that group, sources told The Associated Press earlier this week.”

Zero Hedge is a little impatient with the whole thing:

“Why should Chrysler creditors be forced to suffer and be scapegoated in front of the entire world, while we don’t know who one single large creditor of a Citi or of BofA is? …. but we can speculate…Hey Obama/Tim – how about some bank creditors suffer a loss here and there too in your witch hunt against “all those self-serving Wall Streeters.” Does it maybe have to do with the fact that these are not really Wall Streets at all but the very same gullible fools who are supposed to lap up the $1 trillion + in USTs you will be shovel feeding over the next year… yes, the same investors who still have their investment in Freddie and Fannie marked at par compliments of Uncle Sam and Joe Taxpayer.  All is good though: CNBC just announced that all is priced in, and that no bad news can ever move the market lower as everything negative has been factored in every single stock price in perpetuity and then some.”

$10B is a pittance, agreed. But is it enough to cover Citigroups losses over the next 2 years? – not even a remote chance.

Bloomberg reports that FASB is likely to vote soon to require banks to own up to the vast bucks not currently on their balance sheets:

“The Financial Accounting Standards Board will approve rules on off-balance-sheet accounting by June, forcing banks to add billions of dollars of assets to their books, Chairman Robert Herz said. Rules that let companies keep assets and liabilities including mortgages and credit-card receivables off their balance sheets “were stretched,” Herz said today at an accounting conference at Baruch College in New York. The changes would take effect next year, he said.”

Noah Rosenblatt at UrbanDigs.com wants us to remember that as much or more than $5.2 trillion in assets are not on banks’ balance sheets, but rather,  hidden in so called Special Purpose Entities (QSPE) and Variable Interest Entities (VIE).

“I believe Citigroup has about $1.1 Trillion in off-balance sheet assets as of late 2008. Who knows what the other megabanks have off balance sheet now that the toxic assets belonging to CountryWide, Wachovia, WaMu, Merrill Lynch, etc..have been merged with the acquiring holding company? FASB announced last June that it was delaying the vote on ‘off-balance’ sheet change for a year – after much opposition from Citigroup and other megabanks. Well, time is almost up.”

Rolfe Winkler points out FASB’s change will increase banks reported leverage and asks the question that inquiring minds everywhere want to know and that may make the stress test meaningful…or not:

“This will increase banks’ tangible assets by a large amount.  That’s the numerator in the TCE calculation.  Are bank examiners taking account of this during the stress tests?”

After all, the stress tests ARE supposed to be looking forward- right?  Swamp Report thinks this FASB change will be ignored in the announcement s of Stress Test results on May 7th.  But telling the world there’s no problem with banks and then admitting that assets have been allowed off-balance sheet due to the bankster lobby but which should have been on-balance sheet all along, will damage their credibility.  As bank analyst Nancy Bush posts, after an inital market pop, the market will recognize papered over problems for what they are.

According to the WSJ, the sacrificial lambs will include B of A, Citi and a few regionals:

Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital based on early results of the government’s so-called stress tests of lenders, according to people familiar with the situation.

Industry analysts and investors predict that some regional banks, especially those with big portfolios of commercial real-estate loans, likely fared poorly on the stress tests. Analysts consider Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. to be among the leading contenders for more capital.

No way could GS or JPM need capital, not with crony Geithner at the helm…and… B of A and Citi have not finished squirming out of it yet…

A Federal Reserve document obtained by the Associated Press indicates the government has decided to deflect the attention away from the big banks to smaller regional banks by focusing on loans rather than securities:

“That approach favors a few Wall Street banks while potentially threatening major regional players…

Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system.

Regulators also face pressure to highlight the weaknesses of some banks, or critics will dismiss the tests as a whitewash. That would undermine the goal of improving confidence in the financial system.”

In other words, the regionals are being sacrificed on the altar of the big banks that the government worships.  We predict this will be treated as the scam it is by the market.

According to Reuters, the government is going to reveal the bank stress test results soon.

“The Obama administration is drawing up plans to disclose the financial condition of the 19 biggest banks in the country, the New York Times said, citing senior administration officials.

While all of the banks are expected to pass the tests, some are expected to be graded more highly than others, according to the paper.

Officials have deliberately left murky just how much they intend to reveal – or will encourage the banks to reveal – about how well the banks would weather difficult economic conditions over the next two years, according to the paper.”

Even Rob Blackwell, writing in the American Banker, is skeptical about the stress tests. Read his honest answers to frequently asked questions.

More from Bill Black criticizing the government’s bank bailout and cover-up…this time in a Barron’s interview:

“The scale of fraud is immense. This whole bank scandal makes Teapot Dome [of the 1920s] look like some kid’s doll set. Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama’s presidency. The Bush administration was even worse. But they are out of town. This will destroy Obama’s administration, both economically and in terms of integrity.

With most of America’s biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation…

Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America’s pre-eminence in global financial capitalism at any cost.”

The conspiracy is far reaching: add to the actions of the PPT as documented by Zero Hedge to manipulate the stock market using Goldman Sachs and other loyal-to-the government traders in low volume situations,  the big bank’s clear attempt to manipulate their stock prices by making incomplete yet sensational “announcements” about recent profitaility.  There is indeed amble reason to think this scandal could bring down those now in power.

The New York Post reports that insiders in the FDIC consider Geithner’s Bank stress tests a pointless exercise, aimed at the naive general public:

“The FDIC’s basic beef with the stress test is that it is not a credible way to assess how much additional cash beaten-down banks will need to weather what many Wall Street experts predict will be more losses in the coming months.”

“Many high-profile analysts already are voicing the concern that losses will pile up in areas most of Wall Street hasn’t watched closely, such as residential and commercial loans that are currently on banks’ balance sheets.”

The article also refers to a “growing rift” between the Treasury Department and the FDIC.  We doubt that rift really exists…Sheila Bair is clearly in cahoots with Timid Tim to smoke screen the banks’ true condition.

The NYT reports today that the results of the stress tests on banks are positive:

“For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.”

So… did anyone expect any other result?  Sure the officials say, the banks need a little more capital but it’s nothing to worry about:

“Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.”

What a joke… and the public seems to be falling for it, hook, line and sinker.

“If we lie to the people and they believe us, all will be well.”   We think only the most naive don’t already know it, but since we have seen the suckers move markets on ignorance in the past, it may help to let experts, like Bill Black, a former senior bank regulator responsible for helping wind down the S&L crisis in the late 80′s tell us all again:  the Geithner bank stress tests are a sham.  The Treasury controls the outcome of the tests and insolvent banks will not be identified…unless the bank is not “playing ball” with the Obama administration.