Reply #5: Review of the Stress Tests -- "Too Optimistic" [View All]

Yves Smith, for example, says:

But the stress tests fell far short of the needed level of review. First, they were administered by the industry based on scenarios provided by the industry. Most observers found the “adverse” case to be too optimistic. Even worse, banks got to use their own risk models, the same ones that got them into trouble. And there was no independent verification of the quality of the accounting. The number of examiners per bank was well short of what you’d need to probe a single business, much less an entire firm.

Second, the industry got to negotiate the results. This is simply unheard of. That suggests both a lack of confidence in the process and a lack of belief on the part of the key actors (Treasury Secretary Timothy Geithner, in particular) that the government needs to set the parameters and demand compliance.

William K. Black said:

Bottom line: there were no real examinations. Banks continue to overstate asset quality. The bankers pressured Congress, which extorted the Financial Accounting Standards Board, which gutted the accounting rules on loss recognition. Because there were no real examinations, there were no real stress tests. So only one question is key: why does Treasury believe that anyone will believe its compound fiction?

Simon Johnson said:

The handling of the stress tests shows the administration prefers to adopt a “wait and see” policy toward banks. If the economy recovers, this will help the banks get back on their feet. If the economy doesn’t recover, more subsidies for banks will soon be in the mail.

Bert Ely said:

The stress tests have been harmful in two regards. First, the Treasury white paper describing the tests was so vague as to undermine the credibility of the tests. Consequently, the stress test results may lack credibility, too, especially if enough investors believe that they paint too rosy a picture of the financial condition of those banks seen as the most troubled.


An Insufficient Effort

The bottom line is that these "stress tests" are a joke and have been chock full of yet more violations of the law. Reg-FD is supposed to mandate that material information is released to everyone at the same time. But that of course isn't what has happened; there has been leak after leak after leak, some of them false. Will we see indictments? Of course not, given that most of the leaks are coming from the Treasury itself, and are being used as a means to pump up asset prices!

Testing The Panic Of Bank Insolvency