The secret stress tests

By Felix Salmon
April 13, 2009

If a bank passes a meaningless stress test and nobody hears about it, will the Treasury market rally? Or will there just be lots more volatility in bank share prices?

Answers on the back of a postcard please to T. Geithner, 1500 Pennsylvania Avenue, Washington DC, along with any other unintended consequences of the current making-it-up-as-we-go-along approach to bank regulation.

At the very least, Treasury needs to be much clearer than it has been about exactly when and how the results of these stress tests are going to be made public. And when in doubt, it should release more information more quickly, rather than going the standard Washington route of keeping stuff secret. Because these results are so important, and known to so many people, that they will leak if they’re not released soon.

Comments
8 comments so far

The largest banks in the world would have no chance at passing a stress test. Half of the capital of Japanese banks are equity holdings: http://www.economist.com/finance/display story.cfm?story_id=13447712

David Glasgow Farragut (5July1801–14August1870) was a flag officer of the U.S. Navy during the American Civil War. He was the first rear admiral, vice admiral, and full admiral of the Navy. He is remembered in popular culture for his order at the Battle of Mobile Bay, usually paraphrased: “Damn the torpedoes, full speed ahead!”.

What we have here is a modern political variation: “Damn the taxpayers, full speed ahead.”

Posted by S. Hellinger | Report as abusive

I think that people need to start defining their terms. Are the Stress Tests part of CAP? If they are, then:

“Will applications filed by QFIs or the names of applying QFIs be released publicly?
No. Treasury will not release the names of QFIs who apply for the CAP or those which
are not approved. Treasury will publish electronic reports detailing any completed
transactions, including the name of the QFI and the amount of the investment, as required
by the Emergency Economic Stabilization Act of 2008, within 48 hours of the
investment.”

And:

“What if a QFI needs capital in excess of the investment limit referred to above?
An institution that needs capital in excess of the investment limit referred to above is
deemed as needing “exceptional assistance.” In consultation with the appropriate Federal
banking agency, Treasury will determine whether an institution qualifies for “exceptional
assistance” on a case-by-case basis.
What will be the terms of transactions involving QFIs in need of exceptional
assistance?
QFIs falling under the “exceptional assistance” standard may have bank-specific
negotiated agreements with the Treasury Department.”

I’m assuming that the “negotiated agreements” will be a submitted plan by a bank, that the Treasury deems workable and worthy of being funded. For instance, in the case of Citi, it would be a plan detailing which assets it plans to sell, expected prices, a timetable, etc. Since we’re shareholders, we should expect the same thing. If need be, the Treasury can demand changes or terms deemed necessary.

Once again, isn’t it an attempt to prop up the prices of these assets, since the current possible buyers are bidding very low, and are dubious of dealing with Citi? It wouldn’t really help to make the explicit agreement public, assuming that you’re negotiating to sell assets.

Quite frankly, for me, the real question is whether or not Citi has a plausible plan to get itself back on course. If it doesn’t, we need to change management or consider other strategies. If it does, we need to make sure that the taxpayers get a bountiful part of the upside when Citi is back on course. Isn’t that the bottom line question?

While I very much doubt that it’s the intended purpose of the ‘stress’ tests and other machinations dedicated to directing as much freshly printed money and newly created debt as inhumanly possible to the insolvent major financial institutions, I rather suspect that the way it will actually play out is that when the jig is finally utterly completely and hopelessly up, and the attempts have clearly failed there will, in the end, be very little remaining resistance to placing the weakest institutions in conservatorship/receivership/bankruptcy/ nationalization as at that point no one will be able to credibly complain that the government seized on the chance to seize control but, rather, that it clearly did everything conceivable and inconceivable to avoid that option.

Not that that’s the motive, of course. Indeed, in a sense there isn’t a motive. Simply the spectacular lack of judgement and perspective of Summers, Geithner, and Bernanke, and the Obama administration’s failed judgement in entrusting the formulation of strategy to these vainglorious fools.

Posted by Not Silent Not Bob | Report as abusive

If the real grades were to be announced, the whole classroom would get “F”s. This would cause a run on the banks by days end. They need to get a operational plan underway, and let the private arena fix the problems!

Posted by Bob Morano | Report as abusive

So the recent delay in the ‘stress test results’ is because the news is so good? I doubt it. So much for transparency

http://www.loanclassroom.com/no-wool-pul led-over-my-eyes/

So the delay in the ‘stress test results’ is because it is good news? So much for transparency.

http://www.loanclassroom.com/no-wool-pul led-over-my-eyes/

So the delay in the ‘stress test results’ is because it is good news? So much for transparency.

http://www.loanclassroom.com/no-wool-pul led-over-my-eyes/

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