Monday Morning Stress Test Update

While the fundamentals of many banks are still open to question, the Treasury has provided nothing short of a government guarantee that the top 19 banks are going to be just fine. These banks will survive; the financial system will not collapse. This is a big public service to be sure. And unremarkably, investors have taken up their cues and bid up even Bank of America and Citi, let along JP Morgan Chase and Goldman Sachs. I have three quick observations to make:

1. People evaluate their worlds on a relative, and not an absolute, scale. Compared to where we were, life is good. It may not be all that good, but relative to the recent past, we’re flying. This is a reality of how people think in many walks of life. Are you happy with your pay? Depends on what your coworkers and friends are getting. People who are generally happy with their lives have managed to create a comparison group of others that give them a chance to stand out. Are you a good tennis player? Well, you wouldn’t win a point from Rafael Nadal, or probably Chris Evert for that matter, but if you can beat some of your regular playing partners, you’re happy. So it is with the banks. Compared to where we were, we’re doing fine, just fine.

2. The race is on to return TARP money and return to some semblance of the “open market” days that enabled huge compensation packages and unfettered innovation. Sounds a little like where we’ve been again, but isn’t that how things work? From LTCM to Enron to Bear Stearns, we have an incredible ability to forget the past as soon as possible. And then repeat it.

3. There are thousands of banks in this country, but only 19 have had stress tests. The commercial real estate market is hemorrhaging, new regulations on credit cards that are sure to put a crimp in that long-time bank cash cow are on the way, and of course those bad mortgages everyone used to talk about may be forgotten, but they are not gone. There will be blood.