Bank Stress Test Fails to Test Stress

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Includes: BAC, C, FAS, FAZ, JPM, KBE, WFC, XLF
by: Kristjan Velbri

As Tyler Durden handily pointed out to the financial news reader, who is sick and tired of going through lengthy government documents, the criteria for the stress tests were not very stressful.

Two things strike out from the article - first is that the staff was said to be more than 150, which means that it was probably less than 200. Figuring out the survival chances of America's financial system is not something you do with only 150-200 people. It requires far more than that.

But what is even more appalling is that many of the questions about credit and future loan portfolio projections were left for the banks themselves to evaluate. This means that the government essentially outsourced much of the so-called testing to the banks. If students were allowed to evaluate their knowledge themselves, what would happen? We would have a lot of smart kids with degrees but no skills to prove they're worth it. The government would not allow such a thing to happen because it would undermine the value of valuation.

Whatever criteria was used to "stress test" the banks is really not that important as long as the only goal behind all of it is to show the system is solvent. I'm not here to tell you if the banks which were tested are solvent or not, but I'm not supposed to! The tests should reflect the de facto situation of the banks.

But then, what is the whole point of the stress tests? Glad you asked. The reason behind the evaluation is to hold their position as the main information provider. It's as simple as that. As long as the government stays the number one reporting "agency", it can manipulate the numbers to show whatever needs to be shown. Most of the readers here know that to get a full picture of the unemployment rate, you need to look at U-3 as well as U-6.

But the average American doesn't know that. There is a lot that stands between the average mortgage lender and the average banker. The bankers know how to read the numbers, while the general public is largely alienated by the complicated world of financial jargon.

And even though the average American might not trust the government's test results to full extent, there really isn't any specific entity or news source he knows of to provide another, trustworthy view of the matter. While it's true that financial blogs and business sections of newspapers have been getting a lot more readers over the course of this recession, it is still debatable how much the average reader takes away from all that. As long as the government remains the top provider of news on financial stability and solvency rates of banks, the Geithners and Paulsons of this world consider their job done.

Disclosure: No positions