Stress Tests: A P.R. Stunt Devised by the Banking Industry

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In addition, the stress tests used the models created by the banks themselves:

The banks submitted results using their own methodologies, and most important for the big capital markets players like Citi and Bank of America, their own risk models...

There was no verification of underlying accounting and loan books, not even a teeny bit of sampling.

These were the same models which got the banks into the financial mess in the first place.

And now, the banks are negotiating the stress test results with Treasury.

Virtually all of the independent banking experts say the stress tests are a hoax.

PhD economist Nouriel Roubini said that the stress tests used scenarios more optimistic than what the economy is actually experiencing, saying:
Stress Testing the Stress Test Scenarios: Actual Macro Data Are Already Worse than the More Adverse Scenario for 2009 in the Stress Tests. So the Stress Tests Fail the Basic Criterion of Reality Check Even Before They Are Concluded...

In other terms, the results of the stress test – even before they are published – are not worth the paper they are written on as they make assumptions on the economy that are much more optimistic –even in the worst scenarios that the FDIC has designed - than the actual figures for Q1 of 2009.

Paul Krugman said that the stress tests are merely a "self-esteem class" for the banks

FDIC chief Sheila Bair has said the tests are a sham

Former senior S&L regulator William Black previously called the stress tests a sham and a hoax

The chair of the Congressional Oversight Panel, Elizabeth Warren, is highly sceptical of the stress tests

Indeed, the Federal Reserve itself has more or less admitted that the stress tests do not really measure solvency, saying:
"Even if the tests showed a bank needs more capital, that "is not a measure of the current solvency or viability of the firm".

See also this roundup of doubts about the stress tests.

Just like with the nuclear power analogy, the banks and good old boy Geithner cooked up the stress tests themselves, used their same old models in order to hide the fact that they are actually insolvent (and their insolvency threatens the entire economy, but they are doing everything they can to hide that from the public, and instead to "reassure" the public).

Once it became clear that even the worst-case scenario under the stress tests was much milder than actual conditions, Geithner and company didn't insist anyone change the inputs to the models, but just promised without detail that he would "get tougher" with the banks.

And just like the nuclear power analogy, the banks are now arguing about the cooked-up results, trying to avoid doing anything that would meaningfully reduce the actual risk to the economy.

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