Tuesday, November 30, 2010
Instead of Actually Stabilizing the Economy By Reining In the Giant Banks, Governments Just Launching More Faux Stress Tests as a P.R. Stunt
The big banks caused the financial crisis, and are continuing to drag the world economy down the into a black hole.
So what are the governments of the world doing to address this core problem? Breaking up the giant banks? Nationalizing them? Holding them accountable for their criminal acts? Making them write down their bad debts? Reining them in? Making them act more responsibly?
Of course not!
The governments of the world are instead launching more faux stress tests as a P.R. stunt.
Well-known British economic writer Jeremy Warner said last week that the European stress tests were a sham:
European stress tests weren't worth the paper they were written on ...
Most of us said at the time that the tests had been designed for banks to pass, yet the fact is that it is now hard to believe they took place at all. Conditions have no where near deteriorated as far as the tests had assumed, yet still Allied Irish looks essentially bust. In other words the tests were a lie.
If the Irish stress tests were a sham, what about the rest of the eurozone?
As the Wall Street Journal notes today, Europe is launching a new round of stress tests.
Tyler Durden comments, quoting the Journal:
"As market sentiment toward the euro zone sharply deteriorates, European officials are planning a new round of bank "stress tests" that they say will be more rigorous than the widely discredited exams conducted earlier this year." Thank you for confirming the prior stress test, the one which found that not one Irish bank was impaired, was a bunch of bullshit. Of course, this being Europe, it will require another forceful intervention by the uber-propaganda czar Geithner to get European countries in line: "But the tests are already subject to bickering between countries. While some European leaders are pushing for next year's tests to be broader and more transparent than last summer's exercise, the agency that will oversee the tests says it might opt not to publicly disclose the results at all." And all will be proclaimed to be fine.
The American stress tests were, of course, no better.
As I pointed out last week:
American stress tests were a sham as well.
As I noted in October 2009:
- Time Magazine called the previous stress tests a "confidence game" and Geithner a "con man" for running them deceptively
- Paul Krugman called the stress tests a mere "self-esteem class" for banks that no bank would be allowed to fail
- Nouriel Roubini said the stress tests "fail the basic criterion of a reality check"
- William K. Black called them "a complete sham"
- FDIC head Sheila Bair didn't believe they were credible [and former FDIC chair Isaac said that the stress tests backfired, and actually rattled markets]
admitted that the stress tests did not really measure solvency, saying:
- The stress tests were a P.R. stunt devised by the banks themselves"Even if the tests showed a bank needs more capital, that "is not a measure of the current solvency or viability of the firm".So what is the Fed's bold new plan of attack for dealing with the deteriorating economy and the mortgage crisis?
More stress tests!
As the Wall Street Journal pointed out last week:Fed Orders 2nd Round of Stress Tests
Officials Want Banks to Prove Viability in 'Adverse' Conditions; a Preface to Raising Dividend Levels
Concerns about the health of most large institutions have decreased, though investors remain nervous about the extent of losses banks face if they are required to repurchase flawed mortgages and mortgage-related investments. As part of its review, the Fed will require banks to assess their exposure to so-called "put-backs" of mortgages
Banks will also have to come up with their own set of metrics, including the ability to withstand "very severe" economic and financial-market events, the Fed said.
We are apparently expected to believe that this time will be different.
But the European and American stress tests will undoubtedly once again use overly-rosy economic assumptions, fail to account for the many trillions in debts hidden SIVs and other off-balance-sheet locations (see this and this) and duplicate the other core errors of the previous tests.
Postscript: Here's a funny Saturday Night Live video on the American stress tests: