The industry is buzzing about the stress tests, the results of which will be made public the week of May 4, but news is already developing. The Wall Street Journal is reporting that Citigroup and Bank of America have been told they need to raise capital. This news has gone over like a bombshell. Suddenly, whatever optimism there was has vanished.  

To be sure, there is a lot we still don't know. Executives from Bank of America and Citigroup intend to fight back, but we are not really sure what the issue is. The results for individual banks are scheduled to be disclosed the week of May 4. Until then, we don't have a lot to go on, except media leaks. The uncertainty pushed both banks' CDS spreads wider and pushed down the stocks.   

True, the Treasury has released a methodology white paper, "The Supervisory Capital Assessment Program: Design and Implementation," but that was disappointing to many. One analyst told Bloomberg: "The anticipation over the white paper appears to be much ado about nothing ... The most significant numbers provided by the Fed in the paper appear to be the page numbers." Another was quoted: "I actually cleared the weekend so I could work on it. Now I'm not sure what I'm going to be doing. There's very little meat in what they just provided."  

Lacking details and specific benchmarks, about the only thing we can do is wait. One general criticism is whether the worst-case scenario laid out by the tests is dire enough. The worst-case scenario assumes the recession will worsen and unemployment will rise to 10 percent in 2010 from the current 8.5 percent while home prices decline 22 percent in 2009 and 7 percent in 2010.  

It is likely that this worst-case scenario is what is prompting the government to ask for more capital. It seems fait accompli that, despite their objections, more capital raising is in the works. Regarding Citigroup, I am not sure if the need for more capital assumes the exchange offers that the banks has already agreed to. Or if more capital is needed even beyond that agreement. My sense is that it is the latter. If so, I doubt it will be able to secure more public money, which leaves some sort of securities issue or additional asset sales, or both as possibilities. 

As for Bank of America, we can assume that a Citigroup-like exchange offer is now on the table. The issue is whether that will be enough. - Jim