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Zero Hedge on the Stress Tests


Zero Hedge, a fantastic blog that I’ve only recently discovered, has some interesting comments on the Stress Tests that were recently conducted on the 19 US banks.

1) “more than 150 senior supervisors, on-site examiners, analysts and economists” spent a month reviewing the 19 BHC’s that hold two thirds of the country’s bank assets and account for one half of the loans

More than 150 means at least 151. Is the US Iceland or something? Ten trillion dollars in assets and five hundred trillion dollars in derivatives in one month? A typical single bank examination utilizes hundreds of examiners and takes several months. Clearly the next release of public sector productivity numbers is going to astonish.

(2) ”the firms were asked to project…..the firms were asked to provide…etc.”

In other words, the banks tested themselves and the 150 examiners took their word for it. Any wonder they passed?

(3) “traditional role of capital, especially common equity, is to absorb unexpected losses and thus to protect depositors and other creditors. ”

Well, it used to be. Now that job has been outsourced to the US Taxpayer.

(4) “As a result of the loss recognition framework for assets in the accrual loan book, the results of this exercise are not comparable with those that would evaluate such assets on a mark-to-market basis”.

Absolutely. What does the market know anyway? The banks’ models got us into this calamity so damn if they can’t get us out!

(5) “The SCAP analysis is forward looking, but over a limited time horizon. Losses and resources are projected over a two-year period (2009 to 2010) …”

Apparently Treasury is absolutely certain that the crisis they never saw coming will be over soon and in no way is today like 1930. Great news!

(6) “Each participating firm was instructed to project potential losses on its loan, investment, and trading securities portfolios, including off-balance sheet commitments and contingent liabilities and exposures over the two-year horizon beginning with year-end 2008 financial statement data. “

Again, Treasury outsourced the testing to the banks themselves. So what was the job of the Treasury staff other than to photocopy , collate and file? Was this a Temp Staff? Kelly Girls?

(7) “Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate. ”

I know it looks bad, but believe me, it’s getting better!

(8) Chart Page 9

Under the baseline case the economy stops its downward acceleration in Q3 2009. In the so-called adverse case this occurs in…Q3 2009.

(10) “Under the baseline scenario, BHCs were instructed to assume no further losses beyond current marks”

It’s over! Great news!

(11) “For other consumer loans and for commercial lending (including various types of commercial real estate lending), the agencies estimated loss rates using techniques such as regressions of historical charge-off or default data against macroeconomic variables such as home price appreciation “

I know there are some modelers out there. How does one reasonably construct a regression analysis on past data when nothing similar has ever happened?

(12) “Supervisors evaluated firm loss estimates using a Monte Carlo simulation that projected a distribution of losses by examining potential dispersion around central probabilities of default.”

Ah…smells like Gaussian distributions. The old standard. We have seen how well that assumption works in these unusual times. An example of the dependability of using Gauss, taken from stock market movements in October, and calculated by Nassim Nicholas Taleb of Black Swan fame, showed that the price movements seen in October 2008 could be expected to occur—using estimates based on Gaussian distributions—once every 73,000,000,000,000,000,000,000 years. For those of you not tied to Biblical strict constructionism, the Universe is around 18,500,000,000 years old. Looks like it will be a few quintillion years before we see October again.

(13) Appendix

Take a good look at just how complex and thorough this “test” was. An online dating questionnaire is more probing.

It’s unbelievable. Anyone who tells me the U.S. is transparent, and “clean”, and capitalist, or whatever, deserves a whack on the posterior. But, at least they’re honest people out there commenting on the blatant lying and fogging that’s going on out there. (In this part of the world, news about the bad stuff is the problems, not the bad stuff)

This is one of those times when you can’t say it’s bad, because it gets worse. You have to ask yourself, if we’re standing on such bloody thin ice, is it worth imagining it’s thicker and therefore, not moving? If these banks die, is it the end of the world? It can’t be. It’s never been. By denying them death, the smaller banks of the world, the smarter, well capitalised blokes, are losing out; capitalism feeds the second rung when the first rung dies, and the first rung is on eternal life support.

Maybe the right thing to do is to boycott these banks anyway. Take out all the uninsured money (>100,000) and put it in different, better capitalised banks. Should help in cutting off life support, at least.


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