Bank Stress Tests - Upbeat or Dismal?

The much anticipated bank tests were released yesterday and they were much more positive than many expected - at least according to The Seattle Times and The New York Times. But not so if you read what Turner Radio Network in their report of 'leaks' of the results http://www.mini-url.me/b4wyhn. According to their leaked source "Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.". So who are we to believe?

According to the New York Times writer Edmund L Andrews, 10 of the 19 banks scrutinized will have to come up with 75 billion in capital, Bank of America alone has to raise 34.9 billion. So whats a poor little old bank supposed to do under these dire circumstances? Well I hope that it is along the lines of what Timothy Geitner is quoted in the same article - “With the clarity that today’s announcement will bring, we hope banks are going to get back to the business of banking,”. Banking - what a new concept, instead of the real estate holding companies that they have become in recent months.

To get more clarity, I submitted a question to staff writer, Binyamin Appelbaum with the Washington Post in one of their live chat sessions - on this very issue. My question(s) -

"I've gathered from the newly released stress test results that most of our banks need to raise capital. Is there anything that can be done to get them to start selling some of the distressed properties that most seem to be hell bent on holding on to? In my town last week there were 530 distressed listings on our MLS (bank owned, short, foreclosure) out of a total of 706 listings. That's over 75%. Yet if an agent can find a buyer that can actually get a loan, most of the homes available require lien-holder approval and guess what -- they aren't giving it. So the properties just sit and buyers wait until they can't wait anymore. We all know that most homes are undervalued just as they were overvalued 5 years ago, but isn't 50-75% of something better than 100% of nothing? Shouldn't banks get back to lending and get out of the real estate business? Wouldn't that raise capital and also increase prices and value?"

This was his answer to me:

"Officials hope that the results will encourage banks to start selling troubled assets including foreclosed homes.

The logic goes like this: The banks now need to find private investors (to avoid taking money from the government). Those investors want to put money in banks that are in good shape. So the banks have an incentive to clean house, so to speak."

I certainly do hope he's right. It's not bad enough that buyers are having a harder and harder time to get approved. They are required to have higher credit scores, lower debt to income ratios and still subjected to layer upon layer of additional fees. then when they have finally secure a loan - a home is still far from their reach. Gone are the days of 'no doc' loans, stated income loans, sub-prime loans, buyers today are vetted in a way that many of Obama's cabinet nominees have not been, and still no home run. The few home buyers that do venture into the fray,mostly first time buyers, can see the prize, are aware of prices lower than ever before, yet they can't seem to close. Not because their agents aren't working harder than ever, but because most homes are distressed and require lienholder approval - a thing that is more rare than a current homeowner with equity.

Whether banks shore up their capital by selling common stock, converting preferred shares to common stock, with private investors or any combination - it is well past time for them to do as Mr Geithner has suggested - "Let's get back to banking" - and leave real estate to real estate agents and brokers.