Posts Tagged ‘stress tests’

Zombie Bankhouse?

7 July 2009

I admit, I really don’t know if any major U.S. banks are insolvent or if the banking system as a whole is insolvent. A few months ago, it seemed to be conventional wisdom, with few dissenters outside of Tim Geithner’s Treasury Department. But around the time of the Treasury’s “stress tests” of the largest banks on May 7, which incredibly nearly all of those banks passed, the stock market was once again smitten with the banks.  As John Authers of the Financial Times notes, the S&P 500 Financials Index rose 8.3% the next day, to 175.8, a level more than twice as high as their March low. Financial stock prices have since tumbled by about 14% to 151.5 (as of July 6), but they’re still 85% above their low. A healthier sign still is that credit default swap contracts for bank loans and bonds indicate that the market thinks bank credit is slightly less risky than it was two months ago. Are we out of the woods yet?

Doubtful. The banks still aren’t lending (business and consumer loans are down slightly, real estate loans are about the same), and they’re still sitting on vast piles of reserves ($688 billion, up from $2 billion a year ago). Possibly this is just a rational response to a recession and a general worsening of consumers and firms as credit risks, but it looks like a continuing credit crunch, in which even good credit risks can’t get loans, and it does not look like the behavior you’d expect from healthy banks.

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Too big to say no to

4 May 2009

Banking news of note this past week:

  • A bill to allow bankruptcy court judges to modify the terms of troubled mortgages, “cramming down” the amounts owed so as to avoid foreclosures and make these debts and troubled assets more manageable, failed in the Senate, getting just 45 votes.   En route to the bill’s failure, its chief sponsor, Sen. Dick Durbin (D-IL) said the banks “are still the most powerful lobby on Capitol Hill. And they frankly own the place.”  The NYT noted that the White House, despite backing the bill, did not go to bat for it in its final days.
  • The Treasury has delayed the release of its “stress tests” of the 19 largest banks, apparently because their credulous-looking certification that all 19 banks are currently solvent is not rosy enough for some of the banks, notably Citigroup.  Word is that Citi and Bank of America are contesting the results, even though the tests (1) appear to have used the banks’ own questionable data on the values of their toxic assets and (2) minimize the amount of hypothetical “stress” these banks might be subject to, by entertaining only fairly optimistic worst-case scenarios.  Various economists have said the tests were rigged in the banks’ favor, but evidently some banks are pushing to make them even more so.  Yves Smith offers the full bill of indictment here.

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Trophies for everyone!

26 April 2009

“Too big to fail” evidently means “too big to fail a stress test,” too.  Although the results of the recently conducted stress tests on the nineteen largest U.S. banks won’t be made public until May 4, the advance word on Friday, April 24 was a Whole Lotta RosieFrom the NYT:

‘On Friday, the Federal Reserve reported that the banks whose books it had analyzed recently had enough capital to offset a raft of new losses, . . .’

So everybody’s solvent!  And those toxic assets are both nutritious and delicious!  I bet my students would love it if I could get Tim Geithner or the Fed to write my final exams — nobody would be allowed to fail.

‘. . . reinforcing the belief that the government would support the largest banks even if their financial health eroded, and buoying the stock market.’

Um, didn’t the government already do that, to the tune of $700 billion, not counting the Fed’s waves of loan/subsidies?  But of course those subsidies came with some conditions, from the understandable ($500,000 pay cap) to the asinine (don’t hire no foreigners), so the big banks are naturally eager to pay back those loans and return to looting.  As long as they can still count on a fresh round of bailouts when their losses become too gaping to hide, they’re in a perfect position.  The old mantra of “privatize the profits, socialize the losses” doesn’t quite convey the apparent duplicity at work here.  It leaves out the “fabricate the profits” and “hide the losses” steps.

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