Rortybomb’s run-your-own-stress-test spreadsheet

By Felix Salmon
June 11, 2009

Mike at Rortybomb has the blog entry of the year I think; the background is here. Essentially he’s found a Rosetta-stone like table on page 6 of the stress test results, and has used it to create a fabulous spreadsheet which allows you to plug various different unemployment rates into a cell at the top and see what kind of capital needs result.

Of course there are lots of caveats — linear extrapolations are pretty down-and-dirty things. But the upshot is startling: if unemployment does rise more than Treasury feared it might, there are still quite a lot of banks which will be able to withstand the economic downturn and require no new capital. But let’s say that a realistic adverse scenario today has unemployment at 12.2% rather than 10.3%. What happens to banks’ capital requirements?

AmEx, BoNY, Goldman, and MetLife all remain at zero. A few banks require relatively modest cash infusions: FifthThird, for instance, sees its hole grow from $1.1 billion to $4.9 billion. JP Morgan requires $39 billion, which is probably doable; Morgan Stanley needs $15.6 billion, which might be a stretch. But look at Bank of America: rather than needing $33.9 billion, it suddenly needs to raise over $100 billion. In fact, BofA alone accounts for more than 25% of all the excess capital needs under this exercise.

Says Mike:

It really seems if you go out a bit all the losses are with a few specific banks, and maybe we should look into breaking them up before they become even more of a rotting albatross on our economy’s neck…

I was actually surprised – I assume turning up the numbers a bit would cause everyting to start leaking red ink. Instead it seems that if there is an additional slight downturn in the economy, we know the firms that will have all the problems. They are the ones that are too big to fail.

It seems that the result of the government’s ad hoc financial engineering over the past year or so has been to shove hundreds of billions of dollars of tail risk into a handful of enormous banking institutions. Which isn’t reassuring at all.

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