No Transparency In "Stress Test"

The New York times is discussing a "stress test" for banks in Bank Test May Expand U.S. Regulators� Role. Three things stand out.

1. A massive audit of the 18 largest banks is underway.
2. There is no transparency in the audit.
3. There are no details on the alleged "stress test". Moreover, an audit can hardly be construed to be a stress test.

There is no transparency and there are no details. Is this supposed to inspire confidence?

From the New York Times

Nearly 100 federal banking regulators descended on Citigroup in New York on Wednesday morning. Dozens more fanned out through Bank of America, JPMorgan Chase and other big banks across the nation.

Treasury Secretary Timothy F. Geithner is empowering them [the regulators] to decide which banks are strong enough to survive on their own � and which must be compelled to accept new bailouts from Washington, along with any strings that might be attached to them.

At the center of this effort, part of the Obama administration�s plan to shore up the nation�s financial industry, is a new stress test for banks that federal officials are devising.

Details are scant. But exams for 18 or so of the biggest banks are set to begin immediately, and the first results could arrive within weeks. They are not expected to be made public for every institution. Regulators were also discussing whether to apply the stress test to small and midsize banks, according to an administration official.

The new test is likely to be more stringent than the standards used to determine which banks would receive money under the first round of the federal rescue. And unlike in the government�s initial investments, the amount of capital that banks receive will be based on the depth of their problems.

Analysts said the program hints at a creeping nationalization of the banking industry. �There is no way you can survive the failure of the stress test without having the government inject large amounts of taxpayer money,� said Jaret Seiberg, a policy analyst at the Stanford Group in Washington. �That means the government will own a majority of the bank.�

According to a government official close to the situation, regulators will continue to require that banks maintain a minimum 6 percent Tier 1 capital ratio, a common measure of financial health. Regulators are also expected to insist that at least half of that figure, or 3 percent, come from common stock.

As part of the new program, firms that receive new preferred equity investments from the government can convert them into common shares. Senior administration officials are also considering allowing the Treasury�s original investments under the Troubled Asset Relief Program, or TARP, to be converted into common equity, but no final decision has been made.

�What you are left with is that we are going to nationalize banks that fail the stress test,� Mr. Seiberg said. �How many big companies are going to want to do business with government-run banks?�

What's Clear, What's Not

What clear is the bank regulators do not trust claims from banks they are well capitalized. Citigroup's claim was preposterous. Shortly after Citigroup last proclaimed it was well capitalized, the Fed stepped in to guarantee $301 billion of Citigroup debt and an additional $118 billion of Bank of America debt. See Triage For Troubled Assets for more details.

That the Fed had to offer those guarantees is proof that both banks are insolvent. I suspect there is not a single solvent bank in the top 18. But we will not know because Geithner will not publish the results.

What's equally clear is Geithner is grasping at straws. He has no idea what he is doing because if he did he would be willing to talk about it. There may be "strings" attached to more bailout money, or not. Who knows? What Strings? Who knows?

Geithner Plan Inspires Mistrust

How can there possibly be any trust in a system that may or may not be taken over by the government, under unspecified conditions, with unspecified strings, when there is no transparency as to what is happening anywhere along the line?

I have no problem with the audit. I have a massive problem with Geithner's intention to hide the results and I have a massive problem with squandering taxpayer money to bailout banks whose greed was a big part of the problem. Shareholders and bondholders of failed institutions should be wiped out and management of failed banks should be fired and replaced with executives of banks that avoided these problems.

Truth In Lending

When it comes to lending, it is imperative for Congress and the US public to understand that it was irresponsible lending that created this mess so irresponsible lending cannot possibly be the cure. That is a heart to heart talk Obama needs to make. Sadly, neither Obama nor Geithner, nor most in Congress understands basic economics.

What I fear most is a nationalization of banks with Barney Frank, Nancy Pelosi and the other clowns in Congress planning to force more those banks into continued policies of irresponsible lending just to get "credit unfrozen". Credit is frozen for a reason: It makes little sense to lend.

The only cure is time and price. Home prices need to fall to affordability levels that make sense, and a writeoff of the malinvestments of the last 10 years needs to happen before there can be a sustained recovery.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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