Treasury Stress Test Won't Add Clarity or Transparency - Just Inconsistency

The Federal government continues to prove itself a poor partner, as inconstant as the moon.

First, the Congress famously changed the TARP rules and replaced business decision-making with parochial politics. Now, the Treasury announces that it will break with long-standing practice and disclose examination results of its stress-testing of the 19 largest U.S. commercial banks. This is not only a particularly poor precedent, but unless all the banks score above average, it holds the promise of damaging investor confidence and destabilizing financial markets.

And don’t believe arguments that this decision will bring clarity and transparency where none exists. Knowledgeable observers know that this whole stress test exercise is a fig leaf for our Treasury secretary, who had nothing else to wear for his notorious coming-out speech last February 10th. In fact, the banks stress test their loan portfolios continuously, most testing credits for their probability of default and loss in event of default loan by loan. Further, they stress their entire balance sheets for asset and liability mismatches, collateral sufficiency on swaps, and the efficacy of financial hedges. And it doesn’t take three months to produce. These processes are well-developed, tested, analytically sophisticated, and subject to continuous onsite review by federal and state bank examiners.

Still, stress-testing is an analytical technique, and a limited one at that. The differences between companies make comparisons difficult. For clarity and transparency, the financial statements and disclosures provide a much more robust set of analytical and comparative data.

Until now, examination results have always been protected from disclosure, due to vital public policy concerns, e.g., to avoid destabilizing financial panics. Isn’t one such panic this decade enough? Unfortunately, this decision is pure politics (of which the supply is apparently endless, the demand side less so), perhaps to provide cover to explain why Geithner gave his stress test such a public emphasis, when it is routine.

The secretary’s decision is wrong headed, improper, and poor public policy. He should be protecting the regulatory examination process from political intrusion. Instead, he invites it.

Comments

[Dave Wrixon:]

Mission Accomplished.

Apr 17 02:41 AM

[Fighting Yoda:]

The stress test is completely rigged - the stress level scenarios are a complete joke. The below stress test data is per Nouriel Roubini in Forbes:

Optimistic scenario:
GDP growth will be -2.1% in 2009 and 2% in 2010
Unemployment rate will average 8.4% in 2009 and 8.8% in 2010
Home prices will fall 14% in 2009 and 4% in 2010

Alternative adverse scenario:
GDP growth is assumed to be -3.3% in 2009 and 0.5% in 2010
Unemployment rate is assumed to average 8.9% in 2009 and 10.3% in 2010
Home prices are assumed to fall 20% in 2009 and 7% in 2010

Is even the adverse scenario at all stressful? We are likely to get past the adverse unemployment of 8.9% this month itself.

Apr 17 02:58 AM

[Jasper M:]

A-MEN!
Note that their "adverse" scenario has home prices dropping only 27% in two years, while shadow inventory statistics imply that reset induced foreclosures will continue raining death-by-glut on that sector for at least three years, driving down prices, killing balance sheets & inviting jingle mail.
Who Believes this stuff? Do they really think we are that dumb?

Apr 17 03:45 AM

[Wayne Freeman:]

the treasury and congress morons need to quit fauntleroying around and get the mortgage rates down to 3% and below or else all-hell is going to take over the country as those Alt-A and option ARMs start coming due.

Apr 17 04:44 AM

[Wayne Freeman:]

.. for resets

Apr 17 04:45 AM

[dla35:]

Who cares about about what the optimistic or pessimistic scenario is. The main question should be whethter the results will be give a true insight on who's the strongest and who's the weakest.

If it does answer that question then you'll know who has more chances of going through your own worst case scenario.

Apr 17 06:13 AM

[ArkansasAngie:]

The myth of too much information is a bad thing was invented by people trying to hide bad things.

Any negative results caused by too much information will be paid for by chop blocking fraudsters.

If it involves my money I don't give you permission to not tell me things because you think it's for my own good.

If I invest in a bank today and the government knows that it's a bad investment, then I want some of their personal retirement funds to pay for any of my losses.

Greater good -- horse manure.

Capitalism is based on the idea that synergistically adding up individual good results in the greater good -- not the other way around.

Apr 17 06:32 AM