U.S. Regulators Issue Joint Statement. Markets Tank.

As reported here in yesterday's blog, US regulators took the unusual step of issuing a joint statement to ensure the investing public knows they will be stress testing banks. President Obama is looking to clear up the stench around U.S. banks by subjecting them to reviews and trying to revive liquidity in the market for their toxic assets. The Wall Street Journal thinks the joint statement bothered the equity markets. Stress testing will begin tomorrow for 20 of the largest banks to determine which ones will need government capital injections to survive. The potential downside of "opening the kimono" in this way is that bringing banks' problems into the public spotlight is that it could intensify investor concerns rather than quell them. Citigroup continues to be the big bank "guinea pig", as officials struggle with how much more aid they can or should provide the behemoth as the nationalization debate continues to rage and shareholders worry about being completely wiped out. Former FDIC Chairman William Isaac joins the chorus against nationalization in this WSJ Op-Ed piece. Isaac was responsible for nationalizing Continental Illinois Bank in the 1980s, so he knows of which he speaks. The NYT's Eric Dash reports that at least a partial nationalization seems inevitable for Citigroup. A third injection would give the U.S. 40% ownership in Citi and likely the ability to exert more influence over the bank. Across the pond, the UK's experience with RBS which has led to a 68% ownership stake in the Scottish bank is being looked upon as a sort of model. Key management has been replaced and the the government seems to be controlling lending and strategic decisions. A key question being asked in all of this is "what's the exit strategy"?

And now for the links:

• A story on regulating the Shadow Banks in breakingviews. Political momentum for regulating these entities seems to be gaining steam in advance of April's G-20 meetings in London. Thekey question will be, "what is appropriate oversight?"
  
• PIMCO's Bill Gross thinks nationalization would be a huge mistake in his latest Investment Outlook. Gross says that if you think letting Lehman fail was a mistake, just watch what nationalizing Citi and BofA would do...
  
• What exactly is nationalization? The WSJ has a helpful primer.
  
• "Black Swan" author Nassim Nicholas Taleb says that the current banking crisis will be harder to end than the Great Depression. Taleb goes so far as to say that, for him, the real "black swan" event would be for the markets to emerge unscathed and return to normalcy.
• Here's one way to manage risk: Amex is paying potential deadbeats to go away.
• Morgan Stanley is closing its Chicago prime brokerage unit.
• Geithner's "bad bank" plan may need to provide low-cost financing to distressed asset investors.
• NPR's Jim Zaroli walks us through a bank stress test.
• Is there a dangerous bubble brewing in investment grade corporate bonds? At least one analyst thinks so.
• S&P thinks proposed Basel changes will cut risk taking.