Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 5/4) 

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics. 

Boy, talk about a 24-hour news cycle! What happened to the swine flu? I know we should all be elated that the pig bug has blown over, but you can’t help feeling that either the danger was seriously overhyped or that we’ve been incredibly lucky. All I know is that Westchester friends whose schools closed for two weeks are about to kill themselves, or possibly their school boards.

Don’t we wish that the financial crisis would evaporate just as quickly? Along with steroids in baseball and gay marriage this has to be the most tired story still running. Finally, finally, the much-ballyhooed stress test of the nation’s top banks is finished. It seems here, too, we’ve gotten off easy. Who would have thought that Bank of America’s need to raise $34 billion would be construed as good news? It’s all about expectations; after months of uncertainty (which the market hates), it turns out that the banks do need new capital, but not as much as many had feared.

The leaks out of Washington over the past 60 days were amusing; The buzz was that the government didn’t know how they wanted the tests to turn out. If they were seen as tough on autos, could they be any less severe with the banks? Did they even need to restore confidence in the sector after the companies issued strong first-quarter results? While attempting to cram down mortgage makeovers and re-regulate credit cards, should the government use the stress-test results as a bargaining chip to get the banks to participate in their various recovery programs? 

Keep in mind that banks are: 1) in the constant company of regulators, who camp out in their very offices. The notion that the banks’ condition was in any way a mystery is ridiculous; 2) the economic assumptions behind the stress tests were as distant from the forecasts used in the administration’s budget process as Mars is from Pluto; 3) it has been reported that Citigroup convinced regulators to drop their added capital requirement from $30 billion to $5.5 billion – do you feel reassured?

The bottom line? This process might be viewed as a moderately successful publicity stunt — certainly a more successful one than the recent Air Force One flyover of the World Trade Center site. The bank stocks are up nearly 49% from the day Geithner first proposed the test, but are still off modestly for the year. The test did not increase the banks’ ability to lend and, in fact, analysts like Dick Bove at Rochdale Research have argued it had just the opposite impact. By requiring banks to horde capital, the government has reduced their ability to make loans. The banks will sell assets and attempt to raise private money. Some will take in more government capital by way of converting preferred shares into common. Generally, the companies will attempt to muddle through as the sluggish economy dishes up dropping commercial-real-estate prices and increased losses on consumer loans. In other words, we’re not there yet.

President Obama yesterday engaged in another publicity drive, announcing details of plans to cut $17 billion in government spending. He appeared hopeful of diverting attention from the concurrent announcement – of a $3.6 trillion budget. Sadly, the market wasn’t fooled, and the administration received a shot across the bow yesterday when investors boycotted a government-bond auction. The sour sale sent U.S. treasury yields on a wild ride, with the 30-year bond yield ending up at 4.3%, from 4.1% percent the day before. That, in government bond markets, is a shocking leap. The 30-year yield is now as high as it was last November.