Now It's Official: Stress Test Results Pre-Determined

[girl gone mad]

Now It's Official: Stress Test Results Pre-Determined
http://www.nakedcapitalism.com/2009/02/now-its-official-stress-test-results.html

We have been skeptical that the pending Treasury stress tests on banks, designed to ascertain their state of health, were inadequately staffed and therefore could not do the job properly. Our big concerns were that they had too few bodies to e test financial data versus underlying documentation adequately (usually done on a sampling basis) and they lacked the expertise (and perhaps the mandate) to vet risk models (which we all know have performed impeccably over the last two years.

Is it a test if the results are pre-determined? Apparently Team Obama thinks so.

From CNBC (hat tip reader Early Writedowns):

Said one high-level official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”

Now consider this observation from a reader in comments:

I have a personal anecdote about Citi and the difficulty of spotting how bad their loans actually are. I'm involved with a $300 million condo-hotel development in the Caribbean. Citi has the whole loan (i.e., they didn't securities or otherwise sell participations in the loan). Even now, we expect the hotel needs at least another $100 million to finish construction and open (we are no longer under any delusions that more than a handful of buyers will close on the condo portion of the condo-hotel). So, in other words, Citi is $275M into this project, and it's not certain that the completed hotel will even be worth the extra $100M required to complete and open. Hence, one might plausibly value this $275M loan at zero (i.e., a complete write off). I cannot imagine any stress test would uncover what a huge loss is on the way in the next 12 months. In fact, this loan has not even been pawned off to the nonperforming/distressed debt/workout section of Citi because the interest reserves make it "seem" like the loan is still performing, not to mention that completely out of date pro formas make it "seem" like (i) equity will come in to finish the project and (ii) condo sales will pay down a huge part of the principal once construction is complete. This scenario must be present in a large number of Citi loans, especially in their somewhat active foreign development divisions. Citi must be so far from solvent that it's not even funny. Only hyperinflation in the dollar could ever make it possible for the borrowers to pay back some of these loans. I'd bet that the sooner we face reality on some of these loans and just halt future fundings, the less money the taxpayers are going to lose. As it is, it's almost too late. Too bad for the US taxpayer.

This is merely one story, but there has been a fair bit of coverage in the business press as to how a lot of real estate development, particularly high end resort, is being mothballed or simply cancelled. So there are no doubt other deals like that at Citi and other US banks.

http://www.nakedcapitalism.com/2009/02/now-its-official-stress-test-results.html">more...

[DJ13]

1. Obama's economic team is only worried about keeping the bank execs employed

Geithner and Summers have dealt with this crisis more like fiscally conservative Republicans than progressive Democrats.

[elocs]

2. I had heard that when FDR closed the banks and were supposed to determine

which ones were sound that they simply asked the banks and took their word for it, making it appear like there had been an actual government study.

[snot]

3. Pls K&R this!

[formercia]

4. The rusting hulks of unfinished high-rise condos.

I would invest in demolition companies. Until the blight on the landscape is removed, it will continue to depress real-estate.

[wuvuj]

5. You know it's pretty bad when....

"Investors in Britain also breathed a sigh of relief on reports that Royal Bank of Scotland PLC, which is already majority owned by the British government, was planning a major restructuring that would see 20,000 jobs cut.

News reports over the weekend said the bank was planning to isolate its bad assets so that the market can establish a value for its viable operations. The reports suggested that up to 20,000 employees, or about 10 percent of the work force, could be shed in the process."


http://finance.yahoo.com/news/World-markets-buoyed-by-apf-14436406.html

[formercia]

6. For every investor that gives a sigh of relief

there's a hundred redundant employees that give a sigh of despair.