Today’s best guess is that Euro banks will need $55 to $125 billion in new capital after stress test

Every analyst on—and many off (including yours truly)—Wall Street is trying to put numbers to the results of the Euro Zone’s bank stress test.

In recent days we’ve moved from opinions on which country’s banks will be hit hardest (See my post of yesterday, July 8, Naming names: now we know which 91 European banks will face the none-too-challenging stress test ) to guesses on which banks will pass and which will fail to estimates of how much extra Tier One capital each tested bank will have to raise.

Banks that have to raise a lot of capital but that are shut out of the financial markets right now will require some kind of government rescue. Euro Zone governments have pledged to ride to the rescue but there’s no mechanism yet actually in place for any rescue that’s needed.

All these projections are built on much guess work right now since the terms of the stress test and the Tier One capital requirement that banks will have to meet haven’t been officially disclosed.

One of the best bits of guess work that I’ve seen to date comes out of Credit Suisse. Read more

Naming names: now we know which 91 European banks will face the none-too-challenging stress test

More details last night on who and what are in the stress tests now being administered to European banks in an effort to restore confidence in the financial market.

First, we now know that 91 banks will be included in the test. And thanks to last night’s release from the Committee of European Bank Supervisors (CEBS), the organization conducting the stress tests, we even know which 91 banks are on the list. You can find the 91 names, organized by country, at the end of the CEBS announcement here http://www.c-ebs.org/documents/Publications/Other-Publications/Others/2010/ST_FollowupPR.aspx

Spain tops the list with 27 banks—including 13 from the troubled caja sector. Germany comes in second with 14 banks—including 6 from the Landesbank sector.

Second, like the U.S. stress test that this is modeled on, the European version won’t test bank balance sheets against the worst of all possible worlds. Read more

Watch for a buying opportunity on my watch-list banks if earnings disappoint this quarter

If you’ve been waiting for the three bank stocks I added to Jim’s Watch List on June 25 see my post http://jubakpicks.com/2010/06/25/financial-reform-wont-hit-the-big-banks-anywhere-near-as-hard-as-wall-street-wants-you-to-believe/ )to sell off before putting in a bid, this earnings season may give you the opportunity you’ve been waiting for.

Well, for two of the three anyway. Wall Street analysts have hugely optimistic earnings forecasts out on JPMorgan Chase (JPM) and Morgan Stanley (MS) that the banks are extremely unlikely to meet. Goldman Sachs (GS), the third U.S. bank on my watch list is expected to report a big drop in earnings—but investors who bid the stock up today seem to be counting on Goldman to pull a surprise out of its earnings report. If it simply meets low expectations, these shares too could sell off. Read more

So is it just standard issue Wall Street arrogance or does JPMorgan Chase (JPM) know something?

The bank, which has emerged from the financial crisis as one of the strongest big banks in the United States, is pressing ahead with discussions to buy a big Brazilian hedge fund and private equity group. JPMorgan Chase is in talks with Gavea Investimentos, which manages about $5.3 billion in assets.

Yet the U.S. Congress is pressing ahead with a financial reform bill that includes the Volker Rule, which in its strictest form would ban banks from trading on their own account and limit their ability to invest in or sponsor hedge funds and private equity vehicles.

JPMorgan Chase already controls Highbridge Capital Management, a $21 billion hedge fund, and private equity group One Equity Partners.

Does JPMorgan Chase just have a lot of faith that the banking industry’s army of lobbyists will once again prevail and remove anything truly dangerous to the status quo from the bill now in front of a joint House-Senate committee working to reconcile separate bills from the two houses?

Or does JPMorgan know that the fix is already in and no matter what our elected representatives vote to do, when the rules are finally written by the folks who theoretically regulate the financial sector, the result will be change that banks can believe in.

I’d pick the latter. The financial industry knows they get two shots at this. The first in the halls of Congress is likely to result in something with a few teeth—enough so that Representatives and Senators can tell voters in November that they fought for them against big, bad Wall Street. (Not so many, of course, that members of Congress will jeopardize their ability to fund their campaigns with Wall Street money or get employment in the financial industry once their term in office is over.) The second, out of public view, will take place in the halls and offices of the regulatory bodies that actually write the rules that implement the often vague laws that Congress writes. JPMorgan Chase and other big banks are betting that when the rules are finally written, they will permit the activities that banks deem crucial.

On the track record the big banks are almost certainly right. If that’s true, and you’re cynical enough, that means there are some bargains out there among bank stocks that have been sold off because investors think that financial regulation might have some real teeth.

Let me start this column by explaining why financial regulation with teeth is unlikely. And then end by naming three U.S. bank stocks to put on your watch list for purchase during the summer doldrums to come. (To keep track of my watch list, called cleverly enough Jim’s Watch List go to http://jubakpicks.com/watch-list/ ) Read more

Goodbye Fannie Mae and Freddie Mac as feds decide to delist stocks on NYSE

Shares of Fannie Mae and Freddie Mac, once the giants of the mortgage financing world—plunged yesterday, June 16, on news that the companies’ shares would no longer trade on the New York Stock Exchange. The shares will trade only on the over-the-counter bulletin board system.

The shares have been in danger of delisting since 2008 when federal regulators took over the companies and their stock  prices collapsed. The Federal Housing Finance Agency, which now governs the two companies, instructed them to delist voluntarily after warnings from the New York Stock Exchange that Fannie Mae faced a mandatory delisting since its shares price had averaged less than $1 for the past 30 days.

The Federal Housing Finance Agency could have avoided the delisting by ordering the companies to perform a reverse split wherein, say, 10 shares priced at 56 cents (yesterday’s close for Fannie Mae shares) turn into 1 share worth $5.60. But it’s unlikely that a reserve split would have kept the price above $1 for long and the agency, which is facing the need to come up with a plan to fix these two key players in the mortgage market, has apparently decided that defending the share price of two companies that are currently not viable as public companies sent the wrong signal to the financial markets.

Fannie Mae and Freddie Mac own or guarantee about 50% of the $11 trillion mortgage market but only an unlimited line of credit from the Federal government has kept the companies alive. Taxpayers now own 80% of the two companies and it’s likely that any final plan will require billions more in taxpayer money (the agency estimates $177 billion) so any restructuring will almost certainly wipe out any remaining private shareholders.

The Obama administration has said that it doesn’t plan to tackle the job of restructuring Fannie Mae and Freddie Mac until 2011.

The biggest short-term effect? Read more