Tuesday, February 17, 2009

Fear of Geithner's 'stress test'

Is driving the market -- and especially financial stocks -- down and rightly so.

While the plans have not yet been fully revealed, Marc Ambinder does a nice job explaining the implications of Geithner's stress test.

One of the biggest problems in the financial crisis are Zombie Banks -- the walking dead.
These are banks which are insolvent and no amount of additional capital is going to save them. But these Zombie Banks are feeding on the TARP funds bleeding the fund dry and will never be able to lend again in any significant way because they need all the capital they can get just to keep the doors open.

Geithner's stress test intends to identify the walking dead and presumably put them out of their misery by liquidating them in an orderly fashion. And some of these Zombies are mega banks.

The market understands the implications of these stress tests (especially to shareholders of the liquitdated), thus the sell-off.

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