This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Ticking Time Bomb: U.S. Banking Industry

BOSTON (TheStreet) -- Do you hear that ticking sound?

Today it was leaked that the Federal Reserve has requested a "contingency plan" for Bank of America (BAC). Supposedly, this includes the possibility of spinning off Merrill Lynch for some extra cash.

Such a request for a plan is extraordinary. It proves that the Fed's so-called "stress tests" are flawed. What is the difference between "if business conditions worsen" and the "adverse scenario" of the stress test?

I will argue that the flawed stress tests have given the public, regulators and the banks a false sense of security. As a result, the banking system is unprepared for a realistic adverse scenario.

First, a brief history refresher. On Oct. 28, 2008, Bank of America received $25 billion of TARP money from the U.S. government. In January 2009, it received another $20 billion. In addition, the government guaranteed over $100 billion of Bank of America assets.

Bank of America has been constantly in the news, especially last month:

Aug. 15: BAC announces it will exit the International Credit Card Business.

Aug. 25: BAC says Warren Buffett's Berkshire Hathaway (BRK.A) will invest $5 billion.

Aug. 29: BAC reports it will sell 13.1 billion shares of China Construction Bank.

Aug. 31: BAC announces it is seeking to sell its mortgage lending division.

There was also an extraordinary public response on Aug. 23 to statements made by a popular blogger that the bank may face a capital shortfall in the $100 billion to $200 billion range.

It is obvious that Bank of America needs to raise capital given its actions. It seems like the Fed has finally realized this. The question is: How much and at what cost?

Unfortunately, it is very difficult to decode the true health of Bank of America -- or any other bank.

Let's consider some of these transactions.

Card business

Bank of America announced the sale of the international credit card business. While most understood the sale of European, Spanish and U.K. units, it was surprising that BAC sold the Canadian unit (which was low risk and within BAC's geography). This signaled to the market that potentially drastic steps needed to be taken to increase capital.

1 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,493.37 -69.93 -0.42%
S&P 500 1,925.15 -5.52 -0.29%
NASDAQ 4,352.6390 -17.1340 -0.39%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs