Does the Fed’s Stress Test Signal A Change in U.S. Banks?

In the past few days, we’ve seen a few major developments from the banks on Wall Street. First, the Dow opened higher this morning on news that several big banks have passed the Federal Reserve’s latest round of stress testing. These tests were designed to be robust, taking into account how banks would be affected by a 50% drop in stock prices, a 12% plunge in housing prices, or if unemployment surged to 13%.

Out of the 19 banks that were tested, four failed: Citigroup Inc. (C), MetLife Inc. (MET), SunTrust Banks Inc. (STI) and Ally Financial Inc. These companies will have to resubmit their capital plans that describe how they will manage their capital over nine quarters. Many of the 15 companies that passed, including JPMorgan (JPM), American Express (AXP) and Wells Fargo (WFC) have upped their dividend payouts and announced share repurchase programs.

Of course, what does this mean about my ongoing recommendation to stay away from banks? Well, despite the gains made by a few of these players, I believe there’s still too much uncertainty going around to justify the potential benefits. Of course, just because these banks were able to withstand a “doomsday” scenario does not necessarily make them good investments. We want stocks that will thrive in a variety of situations, not just survive.

And, just this morning, Goldman Sach’s head of U.S. equity derivatives in Europe, the Middle East and Africa published an Op-Ed piece in the New York Times that lambasted Goldman Sachs Group Inc. (GS) for its “toxic” and “destructive” corporate environment. In a nutshell, he criticized the firm for deviating from its commitment to its clients and instead focusing solely on profiting on the backs of its investors. At the end of the letter, the executive announced his resignation from the firm.

This has understandably caused a strong reaction on Wall Street and underscores just how little confidence even some insiders have about these investment banks. Of course, not all financial institutions are the same, but right now there’s still no good way of separating the wheat from the chaff. Let the Fed and other regulators continue probing the banks, and remain as observers, rather than participants, in the uncertain financial industry.

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