Bank Stress Test to Discredit BAC and C Earnings Report?

Banks are getting pounded this morning after Bank of America (NYSE:BAC) handily beat earnings estimates. Analysts were expecting $0.04 in earnings per share; BAC came in with $0.44. 
As I write, BAC shares are down 15%. Now, after Citigroup’s earnings, BAC was expected to beat its number. Are you wondering why investors seem so disappointed at what looks like a solid quarter from a troubled bank? 
Well consider this quote from CEO Ken Lewis: "The fact that we were able to post strong, positive net income for the quarter is extremely welcome news in this environment …It shows the power of our diversified business model …" 
Does Lewis really think this quarter’s earnings demonstrate the "power of [BAC’s] diversified business model …"? I think it demonstrates the power of $45 billion in TARP money and government-assisted refinance loans. 
Ken Lewis is basically lying through his teeth by suggesting that Bank of America is in any way responsible for its first-quarter earnings. Without TARP money, BAC might as well be bankrupt right now. 
And the fact that he’s even suggesting that BAC be given credit for its "diversified business model" is the absolute height of arrogance.
*****Two investor advisory groups, RiskMetrics Group and Glass Lewis & Co., are advising Bank of America shareholders to vote against Ken Lewis’ re-election to the BAC board. I hope shareholders take that advice. 
*****You may recall I called Citigroup’s earnings essentially a one-time event because they are based on mortgage loan refinances and mortgage loan and credit card debt modifications. A Goldman Sachs analyst has seconded that notion, saying the Citigroup actually posted an "underlying" loss of $0.38 a share due to credit losses. 
The same is absolutely true of Bank of America, and investors know it. 
*****JP Morgan’s mortgage analysts said Friday that banks still have $400 billion in losses to write down as their assets continue to deteriorate. The team, led by Matthew Jozoff, believes that banks will need more government support. 
That assessment doesn’t gibe with comments from the Obama administration that future bailouts won’t be needed. Yes, the Treasury’s imminent "Stress Test" results for America’s banks are certainly going to be interesting … 
*****Apparently, some blog reported that 16 of the 19 largest U.S. banks that are being stress tested have failed and are technically insolvent. The Treasury has denied the report, saying that it hasn’t gotten the results of its tests. 
But you can certainly see where this issue is headed … 
The Treasury is conducting stress tests to determine if the 19 largest U.S. banks can survive further weakening in the economy and deterioration of their assets. 
What, exactly, is the Treasury going to say? 
I’ve forwarded the idea that the stress tests will be used essentially as a PR move to build investor and consumer confidence. After all, if the Treasury comes out and says the banks are fine, then everything’s hunky dory, right? 
However, there’s a problem here. If all’s well at the banks, how does the Public-Private Investment Plan move its plan to unshackle banks from their toxic assets forward?  
Seems to me much of the enthusiasm underlying the recent rally is that there’s a plan, however inadequate, to deal with these toxic assets. They are real and they aren’t going away.
On the other hand, if the Treasury announces that a bank or two, or five, is in trouble, that could start a panic and would almost certainly start a run on the bank. 
After much thought, here’s what I think is going to happen: The Treasury will make an example of one, maybe two banks by declaring them technically insolvent. These banks will be placed in receivership (a nice way to say nationalized) at the time of the announcement. The Treasury will already have investors in place to buy the toxic assets (with up to 90% funding from the Treasury and Federal Reserve). And The Treasury will also have a buyer for the suddenly healthy bank in place. 
The whole thing will take only a few days to complete. Panic will be avoided and the Obama administration will make a smooth transition from carrot to stick by subtly letting banks know that they, too, could be declared technically insolvent if they don’t start disposing of their toxic assets. 
*****I suppose one could argue that we all benefit from the plan that will clean up the banks and help get our financial system back on its feet. But there’s only one group that stands to make solid profits from the Public-Private Investment Plan. That’s the investors who are approved by the Treasury to participate. 
That’s because they simply won’t be taking on much risk at all, and they potentially make a lot of money. If you’re interested, the latest issue of Top Stock Insights just profiled three such investment houses that are participating in the Public-Private Investment Program. And we added one of these stocks to the Top Stock Insights portfolio. I’ve included all the details in a Special Report called How to Profit from Uncle Sam’s Toxic Asset Buy Back. Click HERE for details.

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