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Stress test results look familiar to many of us

Whew!

Those stress tests were something awful, weren’t they?

Seems like the whole country was sweating over whether PNC, GMAC and BB&T had the TCE to go the distance. Did they get enough money from the TARP? Was a Fifth Third enough?

Would Snoopy have a doghouse to go home to at MetLife?

Well, yes he will, although the beloved beagle should have moved on long ago. MetLife, by the government’s reckoning, is one of nine stress-tested banks, insurers and finance companies that will not need additional capital. So is BB&T, a regional bank based in North Carolina. Among the 10 that need to do some fundraising are Cincinnati-based Fifth Third Bancorp and Pittsburgh-based PNC Financial Services Group, also regional banks, who will have to scratch up $1.1 billion and $600 million, respectively.

GMAC needs $11.6 billion, in part because it wandered off the road and into real estate.

TARP, the much-criticized Troubled Asset Relief Program, may have helped contain the losses those institutions and dozens of others have absorbed so far.

And TCE? That’s tangible common equity. If you want to know more, look it up.

All told, the 10 capital-poor companies need another $75 billion to absorb the effects of another two years of likely economic hardship. Worst case, according to the U.S. Treasury and Federal Reserve, these institutions could lose $600 billion by the end of 2010.

Not surprisingly, mortgages represent about one-third the total carnage. But it says something about how drunk this country was on loose credit that second-mortgage debt like home-equity loans often used to finance boats and other toys amounts to $83.2 billion, compared with $102.3 billion for first mortgages. Credit card losses could hit $82.4 billion.

The credit card companies are guilty of many abuses Congress is working to correct, but consumers – needful or merely pleasure-seeking – clearly have abused their plastic.

With the completion of the testing, regulators, lawmakers, investors and the public at least know the score. While commentators have quibbled over the test criteria, the transparency of the process has been reassuring, even though some banks resent the findings and deny they need capital. A few, even one or two that aced the exam, have already issued new securities. The rest have six months to get their financial houses in order, or else – the “or else” being more government capital and the interference that goes with it.

These are the companies deemed too big to fail. They can like it or lump it.

Which brings us to testimony last week by Federal Deposit Insurance Corp. Chairman Sheila Bair, a holdover from the Bush administration who has been unusually assertive.

Bair was addressing a couple of the obvious lessons from the financial meltdown: Bigger is not better, and institutions offering a variety of financial services and products did not manage risk, they compounded risk.

The four largest financial organizations controlled 35 percent of domestic deposits, Bair noted, and 45 percent of industry assets as of the end of 2008. Their activity is so pervasive, the failure of any one endangers the entire financial system. No agency – not the FDIC, not the Fed, not Treasury – has the sweeping regulatory oversight to match.

Bair proposes a “systemic risk council” that would not only monitor giant financial institutions, but have the power to manage the divestiture of their assets.

“The ad hoc response to the current banking crisis was inevitable because no playbook existed for taking over an entire complex financial organization,” she said.

She also recommended these institutions be required to have more capital in reserve than smaller, simpler companies whose failure does not endanger the entire system.

Bair, whose testimony touched on many other issues, is not the only official floating proposals for a new regulatory era, but her plan quickly garnered support from Senate Banking Committee Chairman Christopher Dodd, D-Conn., and new Securities and Exchange Commission Chairman Mary Shapiro.

Other plans will follow. Too big to fail has become too expensive to tolerate for taxpayers who now backstop – and own – the consequences of Wall Street’s greed and ineptitude. Stress test many American households, and you’ll find they need more capital, too.

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