Coordinated, Accurate, and Realistic Assessment: All relevant financial
regulators — the Federal Reserve, FDIC, OCC, and OTS — will work
together in a coordinated way to bring more consistent, realistic and forward
looking assessment of exposures on the balance sheet of financial
institutions.
Forward Looking Assessment – Stress Test: A key component of the Capital
Assistance Program is a forward looking comprehensive “stress test” that
requires an assessment of whether major financial institutions have the
capital necessary to continue lending and to absorb the potential losses that
could result from a more severe decline in the economy than projected.
It is fascinating that in the first paragraph they specifically state they don’t want to be overly conservative. Which of the top 19 banks in the country have run their businesses in an overly conservative manner in the last ten years? Has the Federal Reserve been overly conservative in the last ten years? Have the SEC and FDIC been overly conservative in the last ten years? Have consumers, homebuilders, credit card companies and retailers been overly conservative for the last ten years? If there was ever a time to be overly conservative, it is now. It is also nice to know Treasury wants accuracy and better disclosure, but then twists the arm of the FASB to relax mark to market rules, so banks can continue to lie about the value of “assets” on their books. They allow Goldman Sachs to bury the fact that they left December out of their financial results deep in their footnotes. Shockingly, Goldman lost $1.5 billion in December. They continue to allow banks to report one time gains as part of ongoing operations, but billions in losses that are recorded quarter after quarter are not from ongoing operations. The morons on CNBC report whatever the banks say, no questions asked.
Stress Test Sham
This brings us to the stress tests for the 19 biggest banks in the land. The most stressful conditions are supposed to be 10% unemployment and a 20% further fall in home prices. That doesn’t sound too stressful to me. Considering the government reported figures are a manipulated lie, we already have unemployment between 15% and 20% in the real world. A 20% further decline in home prices is a given. The Case Shiller futures index forecasts that the New York Metro area will fall by 31% by the end of 2010. The massive overhang of housing inventory, the coming onslaught of mortgage resets in 2010, and the millions of foreclosures in the pipeline guarantee at least 20% further downside in housing prices. I have a feeling these 19 banks are going to need to study a little harder for their test. Professor Geithner is giving them an open book take home exam and gave them the answers. They will still flunk.
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William Black is a former senior bank regulator. He is currently an Associate Professor of Economics and Law at the University of Missouri. Mr. Black held a variety of senior regulatory positions during the S&L crisis. He managed investigations with teams of examiners reporting to him, redesigned how exams were conducted, and trained examiners. He calls the stress tests conducted on the 19 biggest banks in the country a complete sham. In his own words:
- If you did a real stress test, as Geithner explained them, you wouldn't just have a $2 trillion hole -- you'd impose regulatory capital requirements of 50%. (FYI, the regulators have the power to set HIGHER individual capital requirements based on unusually large risks at a particular bank.)
