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U.S. Banking System Regulators Clash Over Bank Stress Test

Politics / Market Regulation Apr 18, 2009 - 04:06 PM GMT

By: Mike_Shedlock

Politics

Best Financial Markets Analysis ArticleStress is building over the stress test as Bank Regulators Clash Over Endgame.

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions.


With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements, people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure.

The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

Fed officials have pushed for the release of a white paper laying out the methodology of the assessments in an effort to bolster their credibility. The central bank has been leery of inserting politics into the examination process, two people familiar with the matter said.

A statement on the methods is scheduled for release April 24. The Fed, the nation’s primary regulator of bank holding companies, is leading the tests. The 19 companies may get preliminary results as soon as April 24, a person briefed on the matter said.

My Comment: Excuse me but shouldn't the white paper on what the stress test was supposed to accomplish and how it would work have come out before, not after the stress test was conducted?

Geithner has said he crafted the stress test program in an effort to provide more transparency about the health of banks’ balance sheets. He and Fed Chairman Ben S. Bernanke have also noted that most of the 19 banks are currently well capitalized and that not all of them would need new capital.

My Comment: No one in their right mind can possibly believe a thing Geithner says. For that matter no one can possibly believe a thing the banks say either. Please consider Citigroup's trumped up "Trading Gains" earnings.

Citigroup posted a $2.5 billion gain from accounting rules that allow companies to profit when their own creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit.

Citigroup already is benefiting from the Financial Accounting Standards Board’s decision earlier this month to ease rules that forced banks to write down assets whose market value had been depressed so long their impairment was no longer considered “temporary.” That rule change reduced impairment charges by $631 million on a pretax basis, the bank said.

Credit-card revenue fell 10 percent to $5.77 billion, while consumer-banking revenue dropped 18 percent to $6.4 billion. The institutional clients group, which includes trading, investment banking and payment processing, had $9.51 billion of revenue, compared with a trading loss of $4.96 billion the prior year.


Accounting gains shenanigans magically turned another Citigroup loss into a $1.6 billion gain. And if you have not let seen it, please take a look at Jonathan Weil's scathing attack on Well's Fargo's alleged profits in Wells Fargo’s Profit Looks Too Good to Be True.

Geithner's Fake Transparency

MarketWatch is reporting Neither government nor banks will disclose key details about loan portfolios.

Results of the government stress tests government being conducting on the 19 largest financial institutions are expected to be released May 4, but industry lawyers argue that the release is likely to be less of an event that many observers have hoped.

"What we will see is high-level capital ratios that show each bank is a viable institution at current conditions," said Jeffrey Hare, a partner at Alston & Bird LLP in Washington. "Bank regulators don't want to show something that could be misunderstood and create undue panic to the system."

"What markets were hoping to get -- specific details about each bank's viability if things get worse -- they're not going to get," said Hare. "The stress test will fail, [but] banks will pass."

Nevertheless, regulatory analysts contend that government officials will have a thorough knowledge about each bank's capital composition, including loan portfolios and off-balance-sheet commitments, once they complete stress tests. Most of this information will be kept confidential, Hare said.

Stress Test Is A Fraud

Details of the stress test (if any) will be spoon fed to the public, and negative results will be suppressed. Moreover, the results were predetermined and the so-called pessimistic scenario used for the test was a joke: "unemployment rate rises to 8.9% by the end of this year with home prices falling an additional 22% for the same period." That would have been my best case scenario.

Supposedly the pessimistic scenario is now the baseline scenario. Hmmm. What's the pessimistic scenario then? And shouldn't changing the parameters require a re-do of the test?

Is there any wonder why there is now so much stress over the stress test?

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

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