The Banking Time Bomb Test

As if we haven't gone through enough stress this past year, now we need to worry if our bank will pass the government stress tests. For the last two months 200 federal examiners have worked/audited the nation’s biggest banks to determine how these banks would hold up if the recession deepened.

The stress tests are based around a series of “what-if” projections; if the economy worsens or deteriorates. For example “what-if” unemployment rises to 10.3 percent next year, “what if” home prices fall an additional 22 percent, and “what-if” the economy contracts by 3 percent or even greater. The U.S. Treasury has said that the tests are not pass/fail. However it seems that the institutions that will be found to require more capital….will have failed.

It is really a crazy scenario. In order for the stress test to be credible, not all of the banks will pass the test. What happens when your bank is announced that it failed this test? Will this cause a run on the bank? What about the share price? I would bet it would implode. Who would want to own shares of a bank that the govt has deemed is weak after this massive move in stock prices.

Another great scenario could be that despite all of the recent bailouts, there is a need for more banks to be bailed out again. Oh, by the way who is suppose to pay for that? After receiving billions of taxpayer dollars, can the banks still need more bailout money?

Lets be realistic. I find it very hard to believe all is wonderful in Banking land. One has not even seen the next potential downdraft of credit card defaults. There are commercial loans that are defaulting in ever increasing numbers. There are derivative products that no one knows how to value-- or more importantly, there is no longer a counter party. All this besides the fact that there is a tremendous supply of foreclosed homes sitting on the books of major banks. Add on to that the next wave of foreclosures coming with more adjustable mortgages. Really, what has changed with the fundamentals? Even with the sale of a toxic asset. How can something worth close to nothing be worth more than that?

With all the above mentioned it seems that the term “stress Test” might not be the best term. It might just be Banking Time Bomb Test.

What do you think?

Comments

[helplessobs...:]

How in the world can C pass any test, let alone a test that supposes credit conditions worse than in the current economy? The stress test is only one of the huge mistakes the government has made trying to paper over the huge amount of debt that has to be liquidated. The only reason most banks have not collapsed is the FDIC deposit guarantee. Recessions end when assets wind up in the hands of the rightful owners. This occurs at low prices where a reasonable rate of return is possible causing investors to return to investing. Until the debt is gone the recession will continue.

Apr 17 12:47 PM

[infp:]

Any test can be passed when the test is rigged. The government has already committed to giving these large banks billions in additional money through the PPIP plan. That is the governments sole solution to credit crisis; buy toxic assets from the banks with taxpayer money and hope that the market for theses assets recovers in a few years time.

Apr 17 01:16 PM

[jtmortgageb...:]

Large banks like BAC and WFC are refinancing billions of dollars of mortgages as fast as they can process and fund them. Large percentages of these loans are being sold to FHA. The impact to the banks' bottom lines is not just the fee income but getting loans off their books and offloading the risk to FHA (or FNMA or FHLMC). Undoubtedly, banks had set asided loan loss reserves for a large number of loans being refinanced. What impact does that have on the bottom line? I suspect the freed-up reserves are counted as profit. It would be interesting to know the difference in risk to the bank between selling a loan to FHA and securitizing a loan with many others and selling the paper ...

Apr 17 01:55 PM

[Richard K:]

I for one will not be amazed if all tested banks are declared to have passed the test. This is just more Dr Feel-Good medicine to get us all back in a party mood. Then the economy will fix itself - right?

Apr 17 03:39 PM

[Alan Young:]

I guess some folks were not paying attention when the program was announced. No failures will be permitted, but there are different ways to pass: on the bank's own balance sheet strength, or with government assistance. Since the purpose is to stabilize the financial system, this isn't "rigging the test," it's making sure the program succeeds. When you take your car in to a mechanic and tell him to check the fluids, is it cheating if he actually adds oil or coolant to save your car, and charges you accordingly?

There are plenty of things to criticize about the government's handling of this crisis, but this seems like a red herring.

Apr 17 05:29 PM

[brahmburgers:]

To expand upon Alan Young's analogy; If you take your car in to a mechanic for a check up, and the fluids are low, you'd expect the mechanic to not only fill them to proper level, but to tell you of the deficiencies. You might be leaking fluids, or your fan belt might be mis-aligned, needing fixing. The feds appear to be willing to prop up corporations that have been badly run - thereby awarding bad management and poor biz decisions.

Apr 18 09:27 AM

[Edward Ulys...:]

If you really want to understand these huge banks, "The Best Way To Rob A Bank Is To Own One" by William K. Black. Most of the bank examiners were not around back in the 80s, so they're being used on wave number two just like the same type of examiners were used in the S&L fiasco. The control frauds, the financial superpredators, easily enlisted the aid of the top-tier audit firms, top-tier law firms and their politicians to try their best to continue their Ponzi/Madoff schemes. In fact, they have no other choice. Black details how two insolvent firms can be merged and then show profits. Here we go again. Only bigger and much more damaging. Sure wish it wasn't so.

Apr 18 10:13 AM

[slipperyrazor:]

sure sounds reasonable to me. for quite sometime i have thought that,at least, the big major banks are realistically insolvent.

Apr 18 10:48 AM

[mr_subprime:]

The New Orleans Pension Fund just filed suit against Wells Fargo and all the other participants in the Wells Fargo Mortgage Trusts from (what looks like) 2005-2007 vintages. A group of appraisers is suing Wells Fargo for strongarming and blacklisting them if they didn't "hit the numbers" Wells' agents were looking for on appraisals. And yes, I'm suing them for fraud in the origination process. I would surmise the real stress test is going to happen in the courtroom!

Apr 18 11:08 AM

[henarl:]

The "stress test" is just another government PR scam to try to pacify a public that is increasingly angry over bank bailouts that favor the financial oligarchy over the average citizen.

Apr 18 01:29 PM

[Allan Frain:]

Expect that while claiming to be doing "stress tests", those who pass with facility between Banking and Government will be designing the coup to be executed on the next leg of the downturn.

Apr 18 07:43 PM