Monday, May 11, 2009

Stress Tests Weren't Tests At All

Remember back in high school when you failed that test?  Then you went to your teacher and tried to explain to him why it would be really bad for your social life if you went home with an F and how you sort of wanted to go to the prom?  Then your teacher just changed the grade to a B+ and sent you on your way?  Wait a minute.  That never happened to you?  You mean you never got to renegotiate the results of any test you ever failed in high school?  That's too bad because your teacher missed out on a great opportunity to teach you a very important real life lesson.  Because in the real world, if you're a bank that lost multiple billions on lousy bets on the market, and you did it in such a large way as to pose a systemic risk to the global economy and to require a government infusion of taxpayer dollars, and your regulator tells you that you need to raise X amount of capital, you can argue until you get a better deal.

If you thought the stress tests were rigorous and would reveal the true financial situation of the nation's largest banks, think again.  According to the WSJ, when banks were presented with the initial results of the stress tests, they fought back and the government conceded and adjusted the amount of capital downward, in some cases by a significant amount (see Bank of America that was originally ordered to raise over $50 billion.)  Furthermore, according to the FT, instead of needing to raise the full revised-down $75 billion, banks will now be able to meet their capital raise through "earnings" over the course of the next six months.  With the relaxation in mark to market rules, a zero overnight lending rate (the benefit of which banks don't need to pass on to consumers), and the government's generous support of the credit markets through its variety of programs, drumming up some earnings should be a snap.  Problem solved.  Banking system saved.

The problem now is dealing with the economy.  Friday's unemployment report was grim.  Sure, it was "better than expected" but once revisions were added and the temporary census workers subtracted, the economy lost around another 700,000 jobs.  Even if you ignore the revisions and the census workers, since when has losing 539,000 jobs in a month been considered incredibly bullish?  If this is a green shoot, then, well, shoot me.  Because we still have the fallout from the auto industry, the retail industry, and the commercial real estate market to deal with.  When we've figured out what industry exactly is going to pick up the slack for those we've lost, I might consider being an optimist again.  


1 comment:

Mr Wrightwood said...

Hint to K10 - take pictures of your teachers smoking pot with some students and you'd be surprised how your grades improve. I'm not saying Bernanke hits the pipe, but everyone has leveragable points.