Tags: bank | bailout

In Praise of Government Bank Bailouts

By Dan Weil   |   Monday, 27 Jul 2009 03:00 PM

Many experts have criticized the government’s bank bailout in the wake of the financial crisis.

But at least one insider thinks the government handled things well.

That’s Robert Kelly, CEO at Bank of New York Mellon, the world’s largest custodial bank.

“I was negative initially on the stress test, because going public with it created downward pressure on the stock prices for several months,” he told Fortune magazine.

“But in the end, the numbers spoke for themselves and the markets responded.”

The banking system has improved markedly from last fall, Kelly points out.

“Until January or February, many observers thought that the entire banking system was insolvent,” he explains.

“After the stress tests, (we saw) that the capital hole wasn't nearly as great as people had feared and that the underlying earnings power of the banks is fairly high. That's why bank stocks rallied as much as they did this spring.”

The stress test “was breathtaking,” Kelly says.

“Our regulators wanted loan-loss forecasts for the rest of this year and next year using two scenarios: what they expect and then an ‘adverse case,’ which was actually, in many ways, worse than the Great Depression.”

The test “was materially more conservative than what we expect,” Kelly says.

Some experts have turned bullish on banks.

“We’re seeing hope on the part of the market that” banks are “going to show a slowing in growth of non-performing assets,” superstar analyst Dick Bove told CNBC.

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