Stress Test Leaks: What's The Deal?

The results of the government's stress tests of 19 large financial institutions are supposed to be a secret until Thursday. The banks have been given a "harsh gag rule" forbidding them to disclose any details in advance.

Nevertheless, details are leaking like Edward Scissorhands' waterbed. Almost every day brings a new anonymously-sourced revelation about the tests. To wit:

On Tuesday, April 28, the Wall Street Journal reported that Bank of America and Citigroup would need to raise capital, "according to people familiar with the situation."

Bloomberg reported the next day that at least six of the banks will need capital, according to "people briefed on the matter."

On Thursday Reuters had it that the government was leaning toward announcing the test results for individual banks instead of just summary results, according to "a source familiar with administration talks."

"The source, speaking anonymously because talks are ongoing, also said officials will likely release the capital requirements of the 19 firms at their holding company level, not just the needs of their banking units," Reuters reported.

Then, in classic Fishy Friday fashion, it came out in the afternoon that the stress test results wouldn't be released as planned on Monday the 4th, but rather Thursday the 7th. A "government official" told the Associated Press that negotiations between the banks and the administration had pushed the results back. A Treasury spokeswoman referred the Huffington Post to the Fed for comment. The Fed did not respond.

On Sunday, May 3, the Financial Times returned to the original two deficient banks, reporting that Bank of America and Citigroup are "working on plans to raise more than $10bn each in fresh capital, even as they launch last-ditch attempts to convince the US government they do not need to bolster their balance sheets" -- according to "[p]eople close to the situation."

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Two days later on May 5, the Wall Street Journal followed up with word that Bank of America and Citigroup aren't the only bad eggs -- 10 of 19 banks will need more capital, "according to several people familiar with the matter."

Economist Paul Krugman wrote on Monday that the leaks seem like trial balloons, "as if the report's contents may also be dictated by what, based on the response to leaks, the informed public is willing to swallow."

"I think Krugman's right on that," said Dean Baker, co-director Center for Economic and Policy Research in Washington, D.C., in an interview with the Huffington Post. "I assumed they were just playing games, testing public reaction...I don't think these were real leaks."

James Galbraith, an economist with the University of Texas, said he's skeptical that the Fed is really capable of calibrating the public's response to the test results. "That's giving them more credit for wizardry than we have any reason to expect they've got," Galbraith told the Huffington Post.

The focus, Galbraith said, should be on whether the stress tests are sufficiently thorough.

"To what extent do these stress tests evaluate the underlying loan quality and to what extent do they take the bank's own story?" Galbraith asked. "If there's been a searching examination of the documentation behind the loans I would like to know what that examination showed."

On Tuesday Sen. Richard Shelby (R-Ala.) said the test results should be kept entirely under wraps.

James Kwak noted that the banks don't need to do any actual leaking to send a message:

Goldman Sachs, for instance, made a show of raising private capital, issuing new debt without a government guarantee, and offering to repay its TARP money. Jamie Dimon of J.P. Morgan Chase also announced that he could repay his company's TARP money. In both cases, this is code for "We're going to pass those stress tests with flying colors," and the goal is to sow doubt about competitors.

The Federal Reserve said on April 24 that most banks "currently have capital levels well in excess of the amounts required to be well capitalized," though large banks should "hold additional capital to provide a buffer against higher losses than generally expected."

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Comments

[delta queen]

I may not agree with it, but it's apparent to me that bankers are the top of the food chain. I can't beat them, so I've joined them - bought some cheap stocks. I'll see where that takes me.

[BabblingBrooks]

Whatever Happened to Baby Transparency? Probably its mother visited Planned Parenthood­...

USA Today reports, "a government website dedicated to the spending won't have details on contracts and grants until October and may not be complete until next spring--halfway through the program, administration officials said."

[sinnerQ]

The administration is going to learn a tough lesson in the Markets, after this "leak & twist" news. You have to let the market correct and digest news as it comes, or else the gains that have been built up will be lost. It is very healthy for sell-offs to occur after / during quick gains, without them pull backs can be devastating.

[sixx]

My apologies einchicago it does look like BAC is moving on a hoped for favorable conversion, your answer. However, they would have to disregard company statements that BAC doesn't want to convert.

Also, my original question is still left unanswered to me. Why did BAC break both ways on same news from 5% down to 10% up.

Tech Ticker converted me,
"Existing shareholders would suffer further dilution, depending on the conversion ratio used. (Of course, the government's recent history with Citigroup - which, oh by the way needs $50 billion to $55 billion in additional capital -- suggests the conversion rate will be very favorable to the bank and current shareholders, which may explain why BofA shares rebounded from steep pre-market declines and were recently up more than 7.5%.) "

[EinChicago]

"Also, my original question is still left unanswered to me. Why did BAC break both ways on same news from 5% down to 10% up.'

That seems pretty straight forward.

The 5% break down was an initial knee jerk reaction by lay person retail investors to what seemed to be a big number who saw 33 billion and assumed it was another 33 billion cash injection by the government. Once the knee jerk reaction faded and details worked there way out that (a) 33 billion was much smaller than the 70 billion analysts expected and (b) it was already paid for in the 45 billion already received and would just involve a conversion, people realized that waht this really means is Bofa, according to the stress tests will not need any more government aid, even if the worse case scenario comes to pass. Also, you have to look outside the stress test results. The jobs report today showed a massive slow down in the rate of job loss, which is making that 11% peak look a lot less likely and the NRA figures from yesterday make that 22% additional national housing price drop seem very remote.


Today's 10-20% spike in bank stocks is really not that impressive. They were recovering and rising in March but then stopped and receeded in April solely based on fears about the stress test.

[EinChicago]

All the spike today, and likely tomorrow is doing is bringing bank stocks to where they would have been had April not kept everyone artificially scared. The banks were recovering slowly, and if they had recoved just 1-2% er day in April, they would currently be about 30% up from where they are so they have to play catch up now and then slow back down to a normal rate of recovery.


Don't forget stocks like Citi have dropped from $60 to $3 in 16 months. And BofA from $100 to $10. Even with a weak rate of recovery that only gains back 50% of their losses over the same time, they should be around $20 for Citi and $60 for Bof A as soon as confidence returns.

[BabblingBrooks]

Somebody must have told Patrick Leahy...

[Sundialsvc4]

All that this really shows is... just how thoroughly in-bed with the criminals the US Treasury really is. (And, might I be quick to add, the US Congress.)

Let's face it: when a leprechaun goes to Washington with what appears to be an endless pot o' gold, it don't take him too long to find an audience of power-brokers willing to do his bidding. "Man, this is a New Economy! Let's knock those pesky laws out of the way!" Or, "obviously this is a New Reality! It's not insurance and it's not gambling, so we just need to write a law to that effect so that some damned-fool regulator doesn't get any ideas."

Uh huh.

Face it: GAME OVER. Your uber-mega banks that you say are "too big to fail," well guess what... they have already failed.

The leprechaun eventually does leave the room, and when he does, his "gold" goes with him and you are left alone with your supreme folly.

You betrayed the fiduciary duty that you have to over 300 million people, because you were so cock-sure that the day of reckoning would never come this time. But it did come. It is here, and you are (whether you admit it or not) bereft, broke, and utterly ruined.

[Susan Cain]

John Galbraith hit the nail on the head. We cannot expect to know what is truly at stake here if a stress test does not go into the details of just how deep these toxic loans go. Until we get at this information then we are simply fooling ourselves. Mr. Galbraith on another program already had misgivings about the banks doing this audit on themselves. How can we expect the truth when these individuals who allowed this crisis to unfold are now given the job of doing their own job performances. This whole roadshow is just that. Nothing of any substance will come of it except to print more money. I can't even imagine what the hyper inflation is going to be when it finally hits like a tsunami.

[VerticalText]

This leaked information isn't coming from the banks, in my opinion it is coming from the administration. We have seen a trail of intimidation tactics this Administration has used to control others. From threatening the shareholders at Chrysler with the media, to using Jon Stewart to destroy Cramer.

[WilliamProc]

You're saying that Obama hired Comedy Central to shank Cramer????!!!!!!

Put down the Coco-Puffs!

[CA4OBAMA08]

The most important thing that needs to happen is we need to get rid of the Federal Reserve. It is a private corporation that has been stealing from American taxpayers since 1913.

www.endthefed.us

Go there. Sign up as a signature collector.

Help restore our nation to its rightful owners. . . . US.!

[weslenforever]

The results of these phony "stress" tests has been announced already, long before the "tests" even started. The RESULTS? ALL the corps will PASS.
So what I want to know is how much tax payers MONEY went to the "testers" to write the phony RESULTS. How much did they throw away?
This is what these people DO for a living. They come up with a scenario and then conduct phony "tests" to "prove" the results they want to see. It doesn't matter if it's covering up and supporting thieves on Wall Street, or in the Congress, or phonying up junk scientific studies to make people follow their phony leaders ideas of how they should live, what they eat, or even what they think.

[old timer 37]

Senator Shelby wants to keep everything under wraps. I can only think of two rational sources for this position: he thinks the public is too dumb or immature to deal with information or he wants to keep bad information hidden to avoid public pressure to end the corruptions and lousy management (by some of his financial backers) that helped to get us into this mess.

The only policy for a healthy democracy is to reveal all financial information and then let the chips fall where they may; process the public will become more involved and eventually develop increasingly mature reactions. The general rule of thumb should be: when in doubt, reveal; a policy advocated by President Obama.

While a CEO I practiced this policy by personally disclosing a summary of all financial information in quarterly, all-hands meetings, taking any and all questions and making detailed information availabe to all employees. In the more than 5 years of doing this, not one management problem surfaced as a consequence of sharing "too much information". I modified the procedure to briefer quarterly disclosures when employees suggested that I spend less time discussing all the details in the meetings, that it was sufficient to know that access to detailed information and discussions.

Many years later, when my management performance was no longer up to the challenges, I reverted to a minimum disclosure policy because I wanted to make things easier for myself; it wasn't healthy for the organization.

[CenterOfMass]

"...revert­ed...it wasn't healthy for the organizati­on."

Wait, are you advocating FOR or AGAINST disclosure? You seemed to switch in the last paragraph.

I would agree that disclosure is good.

Change is not necessarily good, but feedback always is.

[NC1165]

Or he wants to position his portfolio in advance of the market getting the bad news.

[DragonFly]

Here is a must read article from a former IMF insider: http://www.theatlantic.com/doc/200905/imf-advice
(Credit to 'knosiswar' for providing link on a separate thread.)

The article begins with: "The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time."

[CenterOfMass]

Thanks for the link. That's a great article, which I agree is a "must-read".

[politicscorner]

We'll see how much transparency there is in the process when we see not only how much information the government releases about stress test results, but also whether they release the details of the stress tests themselves.

[Viper]

The details of the test and the assumption paramenters have been released

Regards

[redraspberry]

They are leaking info so the market doesn't drop 500 points in one day. When the whitewashed real results do come out, the market will "already have that factored in"......

[Viper]

It factored it up...

Duh...

Regards

[sheilaofmiami]

These leaks are meaningless. The banks are Zombies still and will continue to be the walking dead until someone finds the silver bullett and puts them all out.