Fed Admits "Stress Tests" Are a Sham

The "stress tests" were supposed to triage those banks worth saving from those which were already too far gone to save.

But as Nouriel Roubini, FDIC chief Sheila Bair, Nobel economist Paul Krugman, former senior S&L regulator William Black and many others said, the "stress tests" are a sham.

Well, they've been proven right.

The Fed said today that - instead of letting the insolvent banks fail - which is what virtually all of the independent experts are recommending (see this for example), the Fed will rescue all banks which fail the stress test.

Indeed, the Fed itself says:

Even if the tests showed a bank needs more capital, that "is not a measure of the current solvency or viability of the firm," the Fed said in Friday's announcement about the test methodology.

So the stress tests have nothing to do with solvency or viability, the advertised purpose behind the tests.

As the above-linked article from Huffington Post points out:

The announcement reinforced the Fed's view that major financial firms are "too big to fail," and that the government must do whatever is necessary to save them, said former Fed examiner Mark Williams.

"It appears 'too big to fail' is a fundamental philosophy _ it's a philosophical principle," said Williams, a finance professor at Boston University.

In extreme cases, a rescue could include a government-backed merger, similar to what regulators did in helping Bank of America to buy Merrill Lynch and JPMorgan Chase & Co. to buy Bear Stearns.

Critics say that policy has put taxpayer money at risk to give banks billions in government bailouts and guarantees.

Indeed.