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Banks Survive 5 MPH Bumper Stress Test

Politics / Credit Crisis Bailouts May 08, 2009 - 11:45 AM GMT

By: Dr_Martenson


Best Financial Markets Analysis ArticleWith great fanfare it was leaked (at strategic market moments throughout the week) and then announced that the 19 largest banks all passed the so-called "stress tests." Under a test track of their own choosing, and with the ability to negotiate the interpretation of the damage resulting from an ultra low-speed collision, the banks have now been proclaimed "safe at any speed." If you are not comforted by this news, you are not alone.

As I wrote about in my last report the bank "stress tests" are a sham in part because the trajectory of even the worst case stress test scenario (called "more adverse" by the regulators) has already been exceeded to the downside by real-world economic results.

Worse than that, the "stress test" allowed banks to set their own prices using methods that you and I are not allowed to see. As we know, banks have been especially bad at figuring out the prices of their assets and, without exception, have always erred on the sunny side of the asset projection landfill. At least that's been true to several years running. Now you are supposed to believe that they've got it all suddenly right and to help you really believe in these results, the government and banks will not release the actual methods or prices used.

And worse than THAT, the stress tests are limited to the standard loan portfolios of the banks and do not include the lion's share of the derivatives that they are carrying on their books. You know, the things that have actually caused more bank assets to go up in smoke than any other bank holding.

After we move past these small problems, we then have to contend with cheerleading-style reporting that is so transparently in the "rah-rah" camp as to be embarrassing.

If the Times and other print media are wondering why they are losing customers and money and in danger of going out of business I would strongly encourage them to begin with an autopsy on this article as an exemplar of "what they're doing wrong." I actually winced when I read this account in the New York Times.

U.S. Says Ailing Banks Need $75 Billion

Verdict More Upbeat Than Prior Scenarios

WASHINGTON — After subjecting the nation’s biggest banks to the most public scrutiny in decades, federal regulators ordered 10 of them on Thursday to raise a total of $75 billion in extra capital and gave the rest a clean bill of health.

*sigh* I hardly know where to begin here. There's so much wrong already in the sub headline and opening sentence that analyzing it is like being asked to critique the strategic use of the soccer pitch by your 3-year old son's pee-wee league team. Where does one start?

I guess I'll begin at the top. I have no idea what they mean by "Verdict more upbeat than prior scenarios." What prior scenarios?Were there any? What are they talking about?

The scenarios used by the government, as I've already cataloged, were not nearly as severe as actual real-world results. Unemployment, GDP and housing prices are ALL already on trends that surpass the worst case scenario of the government stress test. So which scenarios are they referring to? It can't be the government stress test scenarios, because those were more upbeat than reality itself, so I really have no idea.

Next I might note the clumsy use of opinionated and upbeat language such as that bolded in the quote above. For example I could easily take exception to the "subjecting…to the most public scrutiny" opinion because banks are regularly subjected to equal scrutiny with every quarterly SECrelease. There is literally no new information coming out of the banks as a result of this stress test. At least none that I know of. I would kind of expect that "the most public scrutiny in decades" would be accompanied by some additional data that could be seen by the public. Otherwise it's not really "public," right?

As to the "clean bill of health", this too is an unsupportable claim due to the exclusions and limitations of the stress test. That sentence should come with an asterisk(*) and the footnote should read:

(*) The Clean Bill of Health only applies under the baseline conditions of the stress test assumptions which have already been vastly exceeded and further assumes that the banks have been forthright and accurate in their self-assessment of losses to date and future risks, and that there are no substantial or material impacts from their existing portfolio of derivatives which we did not even ask about let alone examine.

In this next paragraph the NYT article carries on in the same manner as in the opening sentence:

The stress tests were aimed at estimating how much each bank would lose if the economic downturn proved even deeper than currently expected. But regulators gave the banks a break by letting them bolster their capital with unusually strong first-quarter profits and also by letting the banks predict modest profits even if the economy again turns down.

You know I think it's great when individuals are given a break and can post unusually strong earnings and are allowed to optimistically predict modest profits even during a tough patch.

But I think it's an obvious travesty of regulatory competence when the same courtesies are extended to failed institutions receiving public money that have repeatedly exhibited a complete inability to conduct themselves in a trustworthy or responsible manner.

In the meantime I might note that everybody but the NYT and their desperately sinking journalistic brethren seems to have figured out that the "unusually strong first quarter profits" recorded by the banks were the result of an arbitrary and fictitious gain due to a mid-flight accounting rule change.

I took the liberty of rewriting that final sentence in the above quote box for the NYT. This is an equally biased and equally valid opinion piece as they put forth, only I am being upfront about it. Here it is:

Inexplicably, despite repeated past failures by these same banks to properly assess risks or manage their operations in a responsible manner, regulators failed to deduct one-time profits resulting from a politically motivated accounting change and even went so far as to allow banks to predict profits under worse economic conditions than those which have already caused them to lose money at the fastest rate ever recorded.

That's the same information only I spun it one way while the NYT spun it the other. The difference is I stuck mine in a blog with a caveat while the NYTput theirs above the fold on the front page as a news article. Frankly, the NYT could stand to hire a few Wikipedia editors who would have shredded the opinions and unsupported claims from that article in seconds.

Just for kicks, see if you can spot the not-so-subtle phraseology and framing that is used to offset those for and against the stress tests:

“The results off the stress tests should put to rest the harmful speculation we have seen over the past few months,” declared Edward L. Yingling, president of the American Bankers Association, hours before the results were even made public.

“With the clarity that today’s announcement will bring, we hope banks are going to get back to the business of banking,” Timothy F. Geithner, the Treasury secretary, said Thursday.


“It’s window-dressing,” said Bert Ely, a longtime bank analyst based in Alexandria, Va. Mr. Ely was particularly skeptical about letting companies bolster their balance sheets by converting preferred shares to common. “That won’t add one extra dollar to a bank’s capital buffer against losses,” Mr. Ely complained. “It’s just moving capital from one place to another.”

Geez - don't you just hate skeptical complainers and prefer those who bring clarity and hope and can put to rest harmful speculation?

OK - I was being sarcastic there. What I wanted to point out is that the NYT used the actual hopeful words of the proponents of the stress tests with a neutral presentation style but then actively inserted the words "skeptical" and "complained" to help shape our opinions of the critic of the stress tests.

These are not terribly subtle attempts at emotional and psychological control of the reader and ever since I have learned to spot them I have lost a tremendous amount of respect for the NYT, et al., and find myself unable to read their articles as anything other than opinion pieces. Why would Isubscribe to such a newspaper? As a capitalist I have a strong belief that propaganda should be free.

Finally, here's my prediction from the Martenson Report on the stress tests released on Sunday May 3rd, 2009:

The stress tests will reveal that everything is mostly okay. For appearance's sake, a few banks will be shown to need a modest amount of capital, but this is only because the Treasury doesn’t think it can get away with simply proclaiming that everything is 100% good at every bank.

I advise you to tune out what is certain to be an upbeat assessment of the condition of our banks, when the stress test results are finally released. My opinion is that the stress tests were specifically designed to be neither stressful nor revealing. Instead, they were designed to produce expected results for the purpose of instilling confidence in banks and in the crisis management team.

I would speculate that the stress test results will lead to a stock market rally, stronger bond prices, and falling gold prices. This has been a fairly reliable pattern after economic news is released, especially if the news is big enough and politically charged. The stress tests meet these criteria in spades.

Were I holding any stocks that I wished to unload, I would use any such rally as the perfect vehicle to accomplish that task.

As of this time stock futures are (of course) up on the announcement. Me? I am getting out of the car and will wave to the banks and their passengers as they set off down the road.

Your faithful information scout,

By Dr. Chris Martenson

Copyright © 2009 Dr Chris Martenson
Dr Martenson is the creator of The End of Money economic seminar series, has extensive experience analyzing and communicating financial information.  Dr. Martenson combines a scientist's attention to fact and analysis (PhD, Duke University, Pathology and Toxicology) with a solid understanding of finance and economics (MBA, Cornell, Finance) with strategic thinking (4 years as a management consultant) to produce an insightful and powerful lecture. He is currently devoted to researching, writing and presenting economic and financial analyses delivering his message via his website, lecture series and is currently working on a related book & movie.

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08 May 09, 12:32
Media Bias

If you are looking for a more informative news story about the bank stress tests I recommend this one from :

Newsy aggregates global news into video clips so you get multiple perspectives on the same story. The bank coverage story uses these sources: The Wall Street Journal, CNBC, Bloomberg, The New York Times, The Washington Post

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