Friday, May 8, 2009
Stress Tests: Don’t Bank on the Results
Image Source: Phil’s Favorites
Yesterday, the Federal Government released the results of so-called “stress tests (pdf). Ostensibly, the tests were designed to determine whether the nation’s largest 19 banks would be able to withstand an even deeper recession than we are presently experiencing. The results show that 10 of the 19 banks needed about $75 billion in additional capital to withstand heavier losses that would likely come if the recession worsened. The ten banks in question immediately put forward plans as to how they intend to raise the required capital, and further suggested that more bail-out money won’t be need (beyond the $700 billion already approved last year).
What, Me Worry?
Great! I suppose we can all go back to sleep now. The banks are all fine and there is nothing to worry about. Right?
The stress tests were lame. They are just another piece of misinformation designed to lull the public into a false sense of well-being – or complacency. For staters, as Money & Markets points out, the test results are based on a bank’s “self-evaluation - not only for loan loss estimates that can be derived from past data, but also for the future performance of trading accounts, which can be far more subjective”. And guess what else! If the banks don’t receive favorable grades, they can appeal the final results and ask for a better score.
The conditions of the tests, and the underlying assumptions upon which they were founded, were designed so that most banks would pass, and the others would have problems that could easily be addressed. According to Money & Markets, the Stress Test don’t fully consider the banks total exposure to derivates, particularly those backed by commercial real estate debts. To make matters worse, the test only assumes ONE YEAR of further decline. Moreover, that rate of GDP decline is assumed to be only 2%. Those are both bogus numbers designed to mislead. Most market forecasts are predicting a much longer recession, and the current rate of GDP decline is closer to 6%.
Martin Weiss, president of Weiss Research, Inc., conducted his own stress test, based on data provided by TheStreet.com Ratings, by the Comptroller of the Currency (OCC), and in first quarter financial statements. Employing more objective economic assumptions, Weiss concluded that 15 of 19 of the nation’s largest banks would FAIL. According to Weiss, “Our analysis directly contradicts the overall conclusion by the banking authorities that most bank holding companies are well capitalized.”
That’s quite a different picture!
When you look behind the curtains, the Fed’s Stress Test doesn’t really give a true picture of what could happen if things get worse. In other words, it was a farce. The results were essentially pre-determined. Increasing bank supervision seems to be a top priority for the Fed. Fed Chairman Ben Bernanke basically said so himself. According to Bernanke, the purpose of the stress tests is to “provide a guide to improvements in financial supervision and regulation.” Foreshadowing this, Bernanke stated Wednesday, "We hope that the Congress will consider revising the provisions of Gramm-Leach-Bliley to help ensure that consolidated supervisors have the necessary tools and authorities to monitor and address safety and soundness concerns in all parts of an organization."
In other words, it’s a power grab! And the stress test was used to generate the results to justify it. As Texas Congressman Ron Paul stated, the tests are “propaganda”, they are “nothing more than a pretense that they can have central economic planning by manipulating money and credit through the Federal Reserve system.”
More Federal Control! Isn’t that how we got into this problem in the first place!