Treasury Exposes Markets to Added Stress Flu

J.D. Foster / April 28, 2009

Markets are weighed down by worries over the new swine flu and the ongoing stress flu; the former from Mexico, the latter from the Treasury Department. Recently, Treasury added markedly to market uncertainties by suggesting it would convert federal capital injections from preferred shares of banks to common shares. This makes little sense unless Treasury’s goal is to unsettle markets further and dilute the holdings of existing shareholders.

Treasury’s stress test examinations of the nation’s largest banks to determine if they have the capital to survive a major economic downturn should ultimately provide some assurances to the stock market. Until then, the stress tests are destabilizing markets by injecting extraneous uncertainties regarding the tests themselves, the process, and the implications for banks that are found to be short of capital. (more…)