The Stress Test Results Are A Joke

May 8, 2009

To evaluate how precise the 'stress test' results published by the treasury really are a few sentences from the relevant FT piece (alternative link):

The US authorities said that the tests projected that losses at the top 19 banks over 2009 and 2010 would reach $599bn if the adverse scenario set out in the stress test materialised.
…
They said that bank operating earnings would absorb $363bn of these losses under the stress scenario. They estimated that 10 of the 19 top banks would need a further $74.6bn in equity to be sufficiently well capitalised at the end of 2010 to cope with potential losses beyond that period.

The regulators put the additional equity need at a much higher $185bn at the end of 2008, but said that actions taken by the banks subsequently had reduced that amount by $110bn.
…
People close to the situation said that Citi convinced regulators to reduce their estimates of its capital shortfall, from an original $30bn-plus to just $5.5bn.

Four simple predictions:

The 'adverse scenario' will turn out to be an optimistic one.
The losses will be higher than $599 billion.
The operating profits will be smaller than $363 billion.
The additional capital needed will be much higher than the now announced $75 billion and even higher than the earlier estimated $185 billion.

When I went to school it was not possible to negotiate a F mark on a test up to B. But Citigroup, and likely the other banks too, managed to do just that. What does that tell us about the regulators/teachers who are supposed to be the adults in the financial markets/classroom?

Posted by b on May 8, 2009 at 14:08 UTC | Permalink

Comments

I read somewhere this morning (probably The Big Picture) that the stress test assumes a debt to equity ratio of 25 to one for the major banks. In effect, this dilutes their capital requirements by half from what they were under Glass-Steagal (12-one). That’s how you can change an F grade to a B.

Posted by: senecal | May 8 2009 15:43 utc | 1

It tells us they will walk … no, run, ‘all the way to the bank’ … laughing ‘ha,ha’.
You ain’t never gonna see yo’ $2.300 BILLION again, an’ you ain’t gonna get to retire.
An’ all these bank-brokers will guffaw in their Dom on this newest Bailout.con run-up.
‘They Americans so g-dly-damn stupit, they don’ deserve no’ their life savin’s, ha,ha.’
I’m in the Federal Witness Protection Program, an’ I oughta know. You’all be maypoled.

Posted by: Guadalahar Jimmy | May 8 2009 16:30 utc | 2

There you have it in a nutshell- The dynamism of capitalism is really just its ability to change the operating rules as it goes along. No matter how much its leaders deserve to fail, most of them don’t because there they have their own rulebook. More will be written, read, and argued about the refereeing of the Barca-Chelsea soccer game than the enforcement of capital standards this week. Speaking of which, its always fun to watch the outrage of a losing side whose main justification for crying foul is that they spent the most capital and therefore deserve to be considered the best.

Posted by: biklett | May 8 2009 16:59 utc | 3

Also as a joke: Stress test Pension funds.
This is bollocks (bullshit for non-anglos).
The expenses saga in the uk is gathering momentum.
This is anarchy cum laude.

Posted by: Cloned Poster | May 8 2009 17:37 utc | 4

b,
It seems grade inflation is everywhere, not just in the classroom.
Buzz Meeks

Posted by: Buzz Meeks | May 8 2009 18:21 utc | 5

AP Sources: Obama wants Fed to be finance supercop

Unlike other regulatory agencies, the Fed does not rely on appropriations from Congress for its operating funds. It finances itself through its investments.

Posted by: plushtown | May 8 2009 23:29 utc | 6

Yet more evidence of gopher government in action, or inaction as the case may be. funny you should analogize the regulators as teachers, because thats what many teachers spend their time doing these days – coaching the kids in testing performance instead of actual performance.

Posted by: anna missed | May 9 2009 1:09 utc | 7

Plushtown, this article by Eliot Spitzer fits right in with Obama’s regulatory captive approach: Look at who’s running the NY Fed.
And Obama wants the Fed to be the supercop of the Too-Big-to-Fail Banksters??

Posted by: jawbone | May 9 2009 3:20 utc | 8

Wolfram|Alpha: a new way to find data online?
There’s been lots of buzz in the tech community about a site called Wolfram|Alpha, which is set to launch in about a week — likely on May 18, according to a spokesman.
On first glance, Wolfram|Alpha looks like a search engine: it has a box where you type in a question or query terms. That’s about where the similarities end, though, because, unlike Google or Ask, Wolfram|Alpha is kind of like an enormous calculator. It takes your question and crunches out an entirely new answer, even if the answer isn’t something that’s been posted on the Web before.
Dear Mr. Wolf: “Where did all our $25.000 BILLION Dot.con, Credit.con and Bailout.con monies go to?”
Please rephrase your question as an equation [e.g. D + C + B => WS + DC + DOD]
Pray Before the Head of Bob: http://www.resort.com/~banshee/Misc/8ball/
Dear Mr. Bob: “Will we ever see our $25.000 BILLION Dot.con, Credit.con and Bailout.con monies again?”
Better Not Tell You Now. Watch this: http://www.youtube.com/watch?v=rYaZ57Bn4pQ

Posted by: Paulie Bulldada | May 9 2009 5:09 utc | 9

“The White House told industry officials on Friday that it is recommending that the Federal Reserve become the ‘supercop’ for “too big to fail” companies capable of causing another financial meltdown, even though it was Fed policy itself which caused the financial meltdown, a conundrum wrapped inside the riddle which is the Obama Administration in its increasing reliance on a ‘Limitless Hope’ jitterbug.”
Yes, by all means give a consortium of private banks, foreign banks controlled by Zionists, Royalists and Papists, yes, let’s give them full intimate access to the financial records of all their competitors, and the power to force their competitors to hold reserves which they themselves do not, because they print theirs on massive fiat paper presses.
THE FED
Rothschild Bank of London
Warburg Bank of Hamburg
Rothschild Bank of Berlin
Lehman Brothers of New York
Lazard Brothers of Paris
Kuhn Loeb Bank of New York
Israel Moses Seif Banks of Italy
Goldman, Sachs of New York
Warburg Bank of Amsterdam
Chase Manhattan Bank of New York
Sort of a Fourth Reich IDIQNB arrangement for the Rockefeller Concorde Sect.
Hey, and you thought Obama meant ‘Oh Yes YOU Can!!’ Ah,ha,ha,ha,ha,ha,ha,ha.
You’re just cattle to be bled and ritually slaughtered by these Ashkenazi’s.
First their Shekinah (‘shock and awe’), as we saw in Baghdad, then their Shechitah (ritual beheading), all as G-d has promised his Chosen Ones”
“Every moving thing that liveth shall be meat for you; even as the green geld have I given you all things.”

Posted by: Pierre Sanguine | May 9 2009 5:57 utc | 10

@Pierre Sanguine @10 – the list is totally nonsense Please refrain from publishing such bullshit here or you will be banned.
Alleged Federal Reserve Ownership

Posted by: b | May 9 2009 6:22 utc | 11

WSJ: Banks Won Concessions on Tests

The Fed ultimately accepted some of the banks’ pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter.
Bank of America’s final gap was $33.9 billion, down from an earlier estimate of more than $50 billion, according to a person familiar with the negotiations.
…
Wells Fargo’s capital hole shrank to $13.7 billion, according to people familiar with the matter. Before adjusting for first-quarter results and other factors, the figure was $17.3 billion, according to a federal document.
…
At Fifth Third Bancorp, the Fed was preparing to tell the Cincinnati-based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion. Fifth Third said the decline stemmed in part from regulators giving it credit for selling a part of a business line.
Citigroup’s capital shortfall was initially pegged at roughly $35 billion, according to people familiar with the matter. The ultimate number was $5.5 billion. Executives persuaded the Fed to include the future capital-boosting impacts of pending transactions.
…

Posted by: b | May 9 2009 8:10 utc | 12

Back to Main