There’s nothing like a rebound on the stockmarket to return confidence to once nervous investors, especially where the fate and capital needs of America’s near-zombie banks are concerned.

So it should come as no surprise that the results of the US Government’s stress tests on the 19 biggest banks is no longer ‘stressing’ the markets. The lunatics running the asylum have concluded the dull days have gone and it’s up, up, up from now on.

Thanks to the remarkable 30% plus surge on Wall Street, and around 90% rise in the US banking stock index, news that some of the 19 biggest banks in the US need billions more in capital is now seen as “good news”, when a month or so ago, it would have rattled the cage and sent shares lower.

But on the basis of some weak green shoots, lots of talk about the recession bottoming, some signs of a slowing in the collapse in US housing (but nothing about a halt to falling home prices, foreclosures and other value destroying moves), there’s now some small level of stability in US financial markets.

Most interest rates have eased (especially key indicators like the spread between overnight rates and cash and the so-called Libor rate in the UK, which is a key global indicator for interbank and corporate lending).

Wall Street bounced 100 points, oil prices surged to over $US56 a barrel and other commodities rose. The losses and dark days of late February and early March are now forgotten and the sunny uplands of expansion beckon, or so the spiel goes from US brokers and analysts and many of their mates in the US media who have now forgotten that the economy is still in the grip of a deep recession.

The results of the US government’s stress tests will be announced on Thursday. The exercise, launched by the Treasury and Federal Reserve in February, is intended to assess the ability of 19 banks that received government aid to withstand a worsening in the economy and prompt weaker ones to raise capital.

According to reports, the likes of Goldman Sachs, JPMorgan, Morgan Stanley and American express are OK: they can withstand a further deepening of the US recession with unemployment rising to 10.4% by next year and staying there for a while.

But that serial zombie, Bank of America, needs a reported $US34 billion (that will teach them for buying the shaky Countrywide Financial Services and even shakier Merrill Lynch and telling the world they were bargains, until the bad debts started rolling in through the door).

Citi could need between $US6 billion and $US10 billion, Wells Fargo about $US15 billion and GMAC is said to need another $US11.5 billion. This stress test is the first to be conducted on such a large group of US banks by an independent group, its proving to be a credible way of assessing their health.

Media reports say Treasury will give all banks which need new capital one month to find it (yet another series of deadlines) and to suggest management changes.

The US Treasury released the results of the stress tests tonight: The Financial Times Lex column remarked this morning: “Thursday may well mark less of the revival of the sector than the beginning of zombie banking in America.”

Peter Fray

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