Banks Object to Stress Test Delay

Geithner was to release the results of the stress test Monday, but Geithner pushed it back to Thursday. The WSJ notes there are objections from some banks:

The results were pushed back several days as federal regulators and the banks have continued to debate the results. Several banks, including Bank of America Corp. (BAC) and Citigroup Inc. (C), have challenged the government's findings.

The results are expected to show that several banks may need more capital, or a higher quality of capital, in order to continue lending if the economy worsens through 2010.

You see, if the Government says that the sensitivity of mortgage portfolio to a 13% unemployment rate and 20% house price fall is to lose 30% of its value, the banks say 10%, the data will be inconclusive. The standard errors to this hypothetical are too large. Lots of details matter: loan-to-value, fico scores, loan vintage--and these interact in various ways, and as home prices have not fallen a lot historically, you have very few observations to generate an empirical estimate of a multivariate relationship.

Thus, if the Treasury does force their stress tests through, and equity investors lose 50% of their value, I smell lawsuit. Remember that in the S&L crisis, many banks recovered billions as courts found the government's redefinition as to what counts as capital, sufficient for a bank to be a going concern, was not justified.

Currently, the release is expected for Thursday afternoon (May 7).

Comments

[Misha:]

And the point of your speculations is what? To encourage more young people to go to law schools?

May 03 11:45 AM

[Fitz919:]

You have to ask yourself, why were stress tests done? Were the stress tests even valid? Was it necessary to keep the results top-secret? Why are there leaks and disputes? Who will ultimately benefit from the stress tests? Is congress owned by the banks? Has the Executive Branch decided it's not good for congress to be owned by the banks, and instead has decided to own the banks itself?

It's a very interesting switch...the Legislative branch was owned by the banks, and now the Executive Branch will own the banks.

May 03 12:31 PM

[Mrudula Shah:]

All this hoopla in the media about the stress test is just a smoke screen or some so-called pundits trying to make their living. Both Geitner and Bernenke (and include Paul Walker) have been telling everybody that the idea of the stress testing is just to make sure that the banks will be O.K. if the economy stays weaker for an extended period of time. If certain banks can't lend because their capital reserves are likley to be strained beyond required level, if the poor economy persists, the Fed needs to know how much help to be provided, if necessary. In any case, the government nether wants to take over the bank nor wants to the bank to go under but remain functional. In other words, the test is just a method agreed by both sides to assess the potential capital need, precisely to keep the institutions afloat, not to let those go under!! It's like a physician diognosing a patient's disease for determination of the medicine dosage he needs to recover his health and not to kill him!! I fail to see why so much noise and anxiety instead of faith and hope for the better!!

May 03 03:33 PM

[Alan Young:]

"if equity investors lose 50% of their value...."
Huh? First of all, equity investors have ALREADY lost 50% of their value--in some cases, 100%--last year, as the follies of bank managers came home to roost. Secondly, if the information revealed by the stress test is not useful to the market, it won't have a long-range effect on the valuation.

"..., I smell lawsuit."
You seem to have your ambulance-chasing hat on backwards. It's FAILURE to reveal significant adverse information that's actionable; revealing it against the wishes of management is, I hope, still legal.

May 03 05:20 PM

[User241885/...:]

The author concludes that "many banks recovered billions as courts found the government's redefinition of what constituted capital for a bank to be a going concern was not justified". Is that what actually happened?

Almost every piece of substantial banking regulation following the S&L crisis, from the Basel Accord to the FDIC Improvement Act of 1991, increased a bank's capital requirements. Those remedial steps would not indicate that banks had too much capital during the S&L crisis, would they?

My understanding is that a primary source of law-suit related income at that time occurred because REFCO-related activities breached so many state contractual rights of creditors and debtors. Perhaps we will see a repeat of "court-room as cash register" as the result ofTARP, TALF and PPIP.

I agree that an overreaching federal government is nothing but trouble, but bad business practices caused the S&L crisis, not the government's capital requirements, which at the time were too low, not too high.

May 03 09:22 PM

[Roger Knights:]

I think what the author was alluding to is that, after the gov't. inspectors got involved in examining banks' solvency after the S&L crisis came to a head, they unfortunately closed several banks that were not really in danger.

May 03 10:38 PM

[Long US stockS:]

me too


On May 03 03:33 PM mruyog wrote:

> All this hoopla in the media about the stress test is just a smoke
> screen or some so-called pundits trying to make their living. Both
> Geitner and Bernenke (and include Paul Walker) have been telling
> everybody that the idea of the stress testing is just to make sure
> that the banks will be O.K. if the economy stays weaker for an extended
> period of time. If certain banks can't lend because their capital
> reserves are likley to be strained beyond required level, if the
> poor economy persists, the Fed needs to know how much help to be
> provided, if necessary. In any case, the government nether wants
> to take over the bank nor wants to the bank to go under but remain
> functional. In other words, the test is just a method agreed by both
> sides to assess the potential capital need, precisely to keep the
> institutions afloat, not to let those go under!! It's like a physician
> diognosing a patient's disease for determination of the medicine
> dosage he needs to recover his health and not to kill him!! I fail
> to see why so much noise and anxiety instead of faith and hope for
> the better!!

May 04 11:32 AM

[Long US stockS:]

Do you want to loose more from "theoritical test" results associated remors /Analysis? I don't


On May 03 05:20 PM Alan Young wrote:

> "if equity investors lose 50% of their value...."
> Huh? First of all, equity investors have ALREADY lost 50% of their
> value--in some cases, 100%--last year, as the follies of bank managers
> came home to roost. Secondly, if the information revealed by the
> stress test is not useful to the market, it won't have a long-range
> effect on the valuation.
>
> "..., I smell lawsuit."
> You seem to have your ambulance-chasing hat on backwards. It's FAILURE
> to reveal significant adverse information that's actionable; revealing
> it against the wishes of management is, I hope, still legal.

May 04 11:37 AM