"...After more than a year of chaos and controversy, some of the leading U.S. banks saw their stock prices soar during the second quarter.
"...now the second-quarter results are out and an examination of those financial statements makes it appear this optimism may have gone too far. And that could mean that bank stocks will pose more risk in the year’s second half than they did in the first six months of 2009..."
"...now clear that the government’s stress tests may not have been stressful enough.
The government’s “more adverse” scenario postulated unemployment averaging 8.8% in 2009 and 10.3% in 2010. With unemployment already at 9.5% in June we have blown through the 2009 estimates. And with some economists actually projecting that unemployment could actually reach the 12% level next year, the government estimates for 2010 were clearly also too low..."
"...Furthermore, neither scenario considered what might happen as a result of the enormous budget deficits, currently forecast at $1.8 trillion in 2009 and $1.3 trillion in 2010. If interest rates zoom up, bank profits will take an additional hit. On the other hand, the “more adverse” scenario assumed a 22% decline in house prices in 2009, followed by a gain of 7% next year. Recent good news in housing suggests those figures may indeed be a bit pessimistic. Overall, therefore, the fact that a bank passed the stress test is not a guarantee of future success..."
"...A number of banks did fine on the stress tests, but then went on to report thumping losses in the second quarter, suggesting the stress tests were wrong..."
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