Flunking the Stress Tests
Why the long-awaited results are meaningless.
After weeks of suspense, the Federal Reserve revealed the results of its bank stress tests Thursday—as if they actually meant something. The Fed claimed to have conducted a rigorous investigation of the nation's 19 biggest banks to determine which ones would need more capital in the event of further economic woes, like a spike in unemployment or a dip in home prices or GDP. And according to Fed chairman Ben Bernanke, we should take "considerable comfort" in the results. But don't be fooled by the drama: All the stress tests did is hand the banks a free pass for further federal aid.
The tests were a meaningless exercise in numerous ways. For starters, the results were predictable—the 10 banks that need more capital were obviously still struggling. Nor was there a big mystery about how much capital they required: There are rules that determine the amount of money banks should set aside to cover their risks, and had those rules been enforced, the institutions wouldn't now be dependent on the public dime. What makes the hype over the stress tests so galling is that the Fed should have been doing this kind of monitoring all along.
But the most farcical thing about the process is that after more than two months of intrigue and secrecy and tactical leaks, we still don't have an accurate picture of the weaknesses of the financial system. In fact, the banks were allowed to participate in the design of the tests—for instance, by naming the price of the securities that they can't get rid of. Now, the government is using the results as rubber stamps for the flawed policy it has pursued since the crisis started.
Before the stress tests, banks received trillions of dollars through various federal channels. Now, well, we have tests to confirm that we should keep doing the same thing. Bernanke said as much to Congress on Tuesday: "Bank holding companies will be required to develop comprehensive capital plans for establishing the required buffers…with the assurance that equity capital from the Treasury under the Capital Assistance Program will be available as needed." Translation: Banks get to choose how to find more capital. And if they fail to raise enough funds, the government will keep dumping money into mismanaged firms, in the hope that it will one day trickle down to the little people.
The banks that came up short in the stress-test sweepstakes have seen the biggest drops in their stock prices—and thus lost the most taxpayer money—since they got their first TARP injections last October. (This list includes Citigroup, Bank of America, Wells Fargo, PNC Financial Services Group, SunTrust Banks, Fifth Third Bancorp, and Regions Financial Corp.) If the TARP infusions plus the trillions in cheap loans provided by the Fed haven't worked, another round of new capital probably won't either.
Finally, despite Treasury Secretary Tim Geithner's declaration that the results are "reassuring," the banks are likely in worse shape than the tests suggest. Just because a bank avoided the capital penalty box doesn't mean it's healthy. Some, like Goldman Sachs, are investment banks that converted to bank holding companies last fall in order to access federal money, and received a two-year grace period to standardize their books with other banks. And some happen to enjoy a symbiotic relationship with the Fed, like JPMorgan Chase, whose last two takeovers (of Bear Stearns and Washington Mutual) were government-funded. JPMorgan Chase's stock was one of the biggest losers after TARP began, yet its tests indicated that it has somehow taken care of its capital needs just fine.
Those banks that were ordered by the Fed to come up with more capital may also be shakier than Geithner would have us believe. The two biggest problem banks, Citigroup and Bank of America, spent last week frantically trying to persuade the Fed that they didn't need extra capital, although they both posted significant increases in losses from loans in their most recent quarterly results. Bank of America's CEO Ken Lewis insisted, "We absolutely don't think we need additional capital." Guess what? His bank needs $33.9 billion, according to the government. The glaring mismatch between the banks' rosy public statements and the Fed's (gentle) testing suggests a troubling reluctance to face hard facts about the real condition of the banking system. Too many numbers are open to interpretation and debate, which usually means that things are worse than they seem.
It's time for the truth from the Fed, or the Treasury, or the White House. We need a different approach that provides capital directly to consumer loans, in order to loosen up credit, provide relief for struggling citizens, and stabilize failing banks. Instead, the government's solution is merely to do more of the same. Which means that before very long, the same banks will be lining up at the public till, asking for more of our money.
Page 1 of 1 
It's high time for this!
It's high time for this! It's high time for that! We ought to insist on this! Or that! Puh-lease....are you people serious? It's high time we did something other than yelling it's high time. This game is over. The game of pretending we're a democracy, pretending we have journalist and a 4th estate, pretending we're electing our representatives, pretending they pay attention to our "high time!" warnings.
There is a point when the score is 54-0 where it's ok to walk off the field, because the referees did so an hour earlier. America has been gutted like a fish by the crony capitalists. We look more like Russia than Russia looks like us.
Just in these past few months how many countless "high time!" articles have I read by how many countless "high time!" authors wishin' and hopin' and prayin' for some elusive justice to rise up and smite the robbers.
Stop all the high timin' and start building something new. Right here inside the corpse, inside the belly of the beast - build something new and hopeful and righteous.
Banks response to first letter.
THANK YOU!! I'm feeling the very same way. Thank you for saying what you did
so eloquently.
There are rules that
There are rules that determine the amount of money banks should set aside to cover their risks, and had those rules been enforced
break them up
-
tagged as:
- solution
Too big to fail is too big to exist. We have to save he banks to prevent massive damage to the overall economy, but once the crisis is past, it's time to break up the financial corporations so their small enough to fail without causing a wider problem.
http://www.ravensblog.net
It would be nice if commentators were actually literate in bank
finance.
Queerly despite the hyperbole re these 'meaningless' tests, the estimates are quite close to the IMF estimates for the US system.
The one item I learned from this article is that journalists feel free to write even when they have but the vaguest understanding of the subject matter.
The banks are toast
Actually, the tests do not even measure the hundreds of billions in losses from derivatives still to come for JPM, Goldman, Citi, HBC, etc.
The bankers destroyed the system, they will eventually be tried for Treason.
Good question. The Obama
Good question. The Obama administration will soon be checking a number of the country’s largest banks which have received some of the $700 billion federal bailout money.
Why is Obama so reluctant to
listen to Krugman or Robert Reich or anyone else who really KNOWS his current approach to fix the banking industry WILL NOT work any more than his stating, "we need to look forward rather than back in regards to torture". This is such a waste of time he could have ordered that he would rebuild the this sector from the bottom up instead of the top down. It also shocked me to hear that he want to make Bernanke {Fed Reserve] as the top cop on the beat who will be responsible for reporting any problems. hat is never going to happen since Bernanke, and Geithner, are way to close to these banksters.
I don't understand how Obama could be doing such a terrific job in other areas of his administration, and yet keep his eyes shut to this PONZI SCHEME perpetrated on the American people. Does anyone have a clear idea what Obama's thinking is on this issue?
The Soviet Union was too big to fail...
-
tagged as:
- solution
... but it failed anyways. The U.S. is not far behind.
The U.S. is in a perfect storm that will be far worse than the great depression.
1) The U.S. banking system is corrupt and teetering on insolvency.
2) The public has been over spending and getting into debt up to their eye-balls. They have no savings to see them through the tough years.
3) The high unemployment is going to get a lot higher.
4) The government is in debt and can never pay it off. They are printing far too much money and there is no way to reign it in. The deficit keeps going up, and the deficit prediction for 2009 is already up 50%, to a staggering $1.75 trillion.
See http://hotair.com/archives/2009/05/11/cbo-2009-deficit-50-greater-than-expected/
5) The social security and medicare programs cannot be paid for without going into more debt. There is no money in the kitty to pay for these programs. Every year in the past 2 decades, the government has raided the social security funds to the tune of hundreds of billions of dollars each year. Now the jar is empty and it takes many more workers to support the retirees.
6) Massive trade imbalance. You need manufacturing jobs to produce goods to sell overseas in order to strengthen the economy. Most of the manufacturing jobs have been sent overseas because the American mindset insists on buying goods from Asia because they are cheaper than similar goods made in America. Because of this, the American jobs are shipped overseas. Whenever you buy something from Wal*mart that is made in China (and what isn't?), a large percentage of the money goes back to China to support the workers and government there. The rapid improvement in the economy and standard of living in China has been met with an equal but opposite fall in the standard of living in America.
You cannot spend your way out of a recession. In the past 20 years America has become a consumer nation, not a producing nation. The Obama government isn't any smarter than the last two governments. They are still controlled by corporations.
7) The U.S. government has been running a ponzi scheme for the past 30 years. They have been printing more bonds and treasury bills to pay just the interest on their existing debt. But now fewer countries are willing to purchase U.S. long term bonds or even short treasury notes. The Fed is actually buying them back. This is like taking money out of your left pocket and putting it in your right pocket and saying you're now richer.
The are only a few solutions to this mess:
a) Raise everyone's taxes to 90% to pay off the debt like they did in the 1930's. Congress won't do this until after the sh*t has hit the fan, and then it will be too late to prevent the disaster.
b) Default on the debt which will cause the U.S. dollar to spiral down like the Icelandic currency. There will be hyper-inflation. This means it will take a wheelbarrow of money to buy your groceries. If you want to see what this is like, visit Iceland.
c) Nationalize all the banks and go back to the gold standard. Unfortunately the U.S. government doesn't have enough gold. Fort Knox has never been independently audited in over 50 years so the public doesn't know how much gold the U.S. actually has. On the high side it is estimated to be around $350 billion, which barely covers the AIG bailout.
I don't see congress having the fortitude to proceed with options A or C. That means the only option left is B, and that will be decided for us when the foreign governments decide not to buy any more U.S. bonds, treasuries or even accept the U.S. dollar. China is already balking at buying more U.S. treasuries and instead is increasing their gold reserves. There is also a plan to get oil off of the U.S. dollar to something more stable. When the U.S. dollar is no longer the reserve currency, it is time to build a bunker in the back yard and fill it with MRE's.
BTW, this stock market rally we've been seeing in the past 5 months, is about to be over. I expect we'll be retesting the March lows of 6600 in late summer or early fall. This 5 month rally is based on enthusiasm, not reality, and will fail big time.
Just one guy's opinion
-------------------------
"The glaring mismatch
"The glaring mismatch between the banks' rosy public statements and the Fed's (gentle) testing suggests a troubling reluctance to face hard facts about the real condition of the banking system."
Interesting statement.
The tests were a meaningless
The tests were a meaningless exercise in numerous ways the results were predictable—the 10 banks that need more capital were obviously still struggling. Nor was there a big mystery about how much capital they required: There are rules that determine the amount of money banks should set aside to cover their risks, and had those rules been enforced, the institutions wouldn't now be dependent on the public dime.
Windows optimizer
