Wednesday, 16 September 2009 01:00

Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

A blast from the recent past:

A small exert from Reggie Middleton on Bank stress testing:

http://boombustblog.com/Reggie-Middleton/907-More-on-Reggie-Middletons-Bank-Stress-Testing.html

The FDIC has released a document describing the stress test and the parameters used to assess the banks health under assumed base case and adverse case scenarios. Unfortunately, their adverse case scenarios are actually the base case scenarios. Look at the appendix of this document from the FDIC (I will save it if I were you to ensure that it doesn’t disappear when word gets out), and you will see an unemployment “adverse case” of 8.9% and a average baseline case of 8.4%. Well, the baseline case is already too optimistic. This is a fact, since I just pulled the government’s own numbers (see below) and unemployment for the month of March is currently 8.5%! Thus, you can see where the baseline assumptions are already too optimistic, without a doubt. If one were to look at the rate of increase of unemployment, it would not take much imagination to see the actual rate easily pierce the “adverse” case before the end of 2009 (we are near the adverse case alreay, and this is just the beginning of the 4th month of the year). If this were to be true, it would be safe to assume the stress tests to be a total farce, with realistic numbers showing banks to be in far worse conditions. Be aware that I am not using shadow stats, or numbers derived by basement bloggers, but the actual numbers released by our fair government.

Five months later and unemployment is pushing 10% with an average of about 9.7%-ish. The banks returned the TARP based upon a worst case scenario about 100 basis below where we are now, with unemployment still climbing. Why hasn't anyone required a new round of stress testing???

Last modified on Wednesday, 16 September 2009 01:00

8 comments

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  • Comment Link Rumi Wednesday, 16 September 2009 22:33 posted by Rumi

    I've heard similar comparisons, but I don't think that it's valid to say that 2009 is analogous to any of the years between 1996-2000. First, there's severe credit contraction, and on top of that, there's very (unsustainably) high unemployment, as Reggie pointed out. Moreover, all those foreigners can't afford to keep buying US debt, and the states and municipalities probably can't raise the cash they need. Something's gotta give.

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  • Comment Link gjk313 Wednesday, 16 September 2009 20:38 posted by gjk313

    Well, all of this just reminds me of 1996-2000. Who was crying foul about Pets.com and ICGE and Commerce One and all the other crap. Sure, people might have been crying foul somewhat but cheerleading the stock market to go up is as all-American as apple pie.

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  • Comment Link gwizz Wednesday, 16 September 2009 20:10 posted by gwizz

    As Gerald Celente would say, this is not a recovery, it's a coverup.

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  • Comment Link Rumi Wednesday, 16 September 2009 19:34 posted by Rumi

    /, yet the media doesn't cry foul. /

    So far as I can tell, the media has never cried foul over any shenanigans over the last decade, so it would be surprising if they did so this time around.

    Given the lack of shorts, it'll be interesting to see who they try to scapegoat when the market drops this time around.

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  • Comment Link shaunsnoll Wednesday, 16 September 2009 16:33 posted by shaunsnoll

    http://seekingalpha.com/article/160112-an-insider-s-view-of-ginnie-mae-mbs?source=email

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  • Comment Link Reggie Middleton Wednesday, 16 September 2009 10:08 posted by Reggie Middleton

    Unfortunately, I cannot disagree with your assessment of the government's handling of this banking mess. I have not studied the 2nd leg of the 30's downfall, but it would be no surprise whatsoever to find that an environment similar to this one was a precursor to such.

    It is amazing that stocks go up while volume goes down, with no material participation in the rally and no real faith in the fundamentals of the companies allegedly "beating" drastically reduced expectations, yet the media doesn't cry foul.

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  • Comment Link Ned Wednesday, 16 September 2009 09:30 posted by Ned

    Good Morning Reggie:

    Our Government's handling of the entire financial implosion has been a complete sham, nothing shy of it. Not only are the banks hiding their true financial condition, 'there is no growth' of the economy. Borrowing money to subsidizing business is not private demand lead growth. As long as the number of unemployed/underemployed continues to rise (regardless if the rise is fast or slow), combined with still rising negative equity for homeowners and still rising credit card delinquencies in the aggregate, the banking & financial condition will remain worse than the Government set worse-case scenario.

    Interesting how the fundamental of the economy and that of the equity market's 'hope rally' are getting further and further and further apart...

    Is 'this' the type of disconnect that preceeded the second downleg in the 30ies??

    Ned.

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