Politicians Hijack the Stress Test: Not Good

Monday morning’s leaks erased all doubt that the stress tests of 19 financial institutions have become a political test, not a regulatory one. Timed to coincide with Bank of America’s (BAC) annual meeting of shareholders, reports that Bank of America is “billions” short on capital probably influenced the final vote, perhaps costing Ken Lewis his chairmanship. Still, given that last year more than 40% of shareholders voted to strip him of that job, it surprises that only a bare majority agreed this year, given all that’s happened.

As we prepare for next week’s release of stress test results, we should keep in mind that stress tests, by definition, lack rigor. They can be designed to support any conclusion. Not stressful enough? Dial up the stress. Still well-capitalized for regulatory purposes? Then disparage the capital structure. In short, change the rules.

We would do well to ask, who is in charge of this process? Recall that, initially, stress test results would not be released publicly, based on long-standing regulatory practice and sound public policy. The first “tell” that the politicians had hijacked the regulatory process came a couple of weeks ago, when Treasury secretary Geithner announced that test results will be made public after all. The leaks confirm the tell. This result is lamentable and damaging. It will be difficult to reverse. Politicians are poor regulators, inclined to overreach.

And Ken Lewis? He no longer serves at the pleasure of his board. He serves at the pleasure of the Treasury secretary.

Comments

[Alan Young:]

Okay, granted, politicians are poor regulators. So, apparently, are corporate boards, especially when chaired by the CEO. Someone, please find us some good regulators.... anyone?

May 01 03:54 AM

[Econ 101:]

Support HR 1207, Audit of the Federal Reserve. Shine a light into these cockroaches and see them scatter. Wish we could audit congress.


Find your congress person at: www.house.gov/house/Me...

May 01 11:05 AM

[PainfullyAware:]

"What Haven't Politicians Hijacked" Is Probably Going To Be A Shorter List When This Is All Over.

May 01 06:26 PM