News shocker: Citigroup, Bank of America could need more cash

Early results from the stress tests supposedly indicate that the two big banks will require more capital. Didn't we already know that two months ago?

Published April 28, 2009 2:57PM (EDT)

The Wall Street Journal reports:

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...

Didn't we already know that? Hasn't the underlying presumption from the get-go been that the two big banks were in trouble? There is a bleak hilarity to these proceedings. After all the endless Sturm und Drang concerning the stress tests -- sham or no sham? too optimistic about the state of the economy? sure to be manipulated by the banks -- we are now exactly at the point where we were at the beginning: faced with the problem of what to do with too-big-to-fail institutions that are likely to need a lot more capital to survive an extended economic downturn.

The next step, remember, according to the Geithner plan, will be to give the banks deemed in need of capital six months to raise funds from private sources, before the government steps in. Given the global economic situation, it seems highly unlikely that either bank is going to witness a cavalry charge of white knights coming to the rescue, meaning that six months from now, little will have changed. If the political goal here is to keep kicking the banking problem down the road while the administration deals with the rest of its ambitious agenda, then the White House is executing its plan efficiently. In the current climate, six months is a pretty darn long postponement of the day of reckoning.

But for critics of the Obama strategy, any postponement just prolongs the period in which real damage is being done to the U.S. economy. Rather than drag the process out endlessly, they'd like to see an immediate resolution. Bite the bullet, already! Get the big banks into a government-organized bankruptcy and break them up into a bunch of little pieces.

That may still end up being the end game. But a lot could happen in the next six months. The economy could stabilize, or it continue to contract at a rapid rate. The Geithner plan to subsidize the price discovery of toxic assets could turn out to be a success, or the utter failure that it is almost universally expected to be. If the economy does get much worse and the Geithner plan fails, the administration is going to be in a tough spot.

But here's one more speculation to throw into the pot: At the moment, stock market investors appear relatively calm about the prospect that Citi and Bank of America might need more capital. Would they have had the same reaction two months ago if Geithner had announced, shortly after confirmation as treasury secretary, that the White House had determined the two banks were in deep trouble? Is it possible that by stringing out the process, the White House has diffused some of the panic in the markets? Maybe by delaying the inevitable, the administration has succeeded in making the inevitable unexceptional.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Globalization How The World Works Timothy Geithner Wall Street