"Not a Real Test at All" - on the "stress tests" of banks:

[SOS]

by William K. Black, an associate professor of economics and law at the University of Missouri-Kansas City, is author of “The Best Way to Rob a Bank Is to Own One.” He served as a senior official for the Federal Home Loan Bank Board and the Office of Thrift Supervision.

"Leaks claim that the test found that Bank of America needs $33.9 billion in additional capital. The bank reportedly has the highest requirement of any of the banks that were tested. Treasury officials are leaking furiously that the results of the stress tests prove that no large bank is insolvent or even seriously undercapitalized. The stress tests, as predicted (and designed) have found that there is no banking crisis — all is well. Even Bank of America can “raise” the “additional” capital with the stroke of a pen by designating prior aid from the Treasury as “capital.”

Treasury used a ‘one size fits all’ stress test that grossly understated derivatives risk — the primary risk that the largest banks face.
The case of Bank of America illustrates the mysterious nature of the stress tests. Here’s what we’ve been told: the Federal Reserve sent roughly 180 examiners for about eight weeks into the 19 biggest banks. In that time period a team of that size would be able to examine the asset quality of two or three massive banks with plain vanilla assets. You cannot do a meaningful stress test without examining thoroughly each bank’s asset quality. Doing a meaningful stress test takes weeks after completing the asset examination.

It is a particularly complex, individualized process when the assets are financial derivatives because evaluating counter-party risk is exceptionally difficult.

Bottom line: there were no real examinations. Banks continue to overstate asset quality. The bankers pressured Congress, which extorted the Financial Accounting Standards Board, which gutted the accounting rules on loss recognition. Because there were no real examinations, there were no real stress tests. So only one question is key: why does Treasury believe that anyone will believe its compound fiction?"

http://roomfordebate.blogs.nytimes.com/2009/05/06/grading-the-banks-stress-test/#yves


The stress tests are a farce.