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Bernanke Cites Stress Tests As Evidence Banks Are Fine, Continuing Stint As Jedi Master

The Huffington Post  |  By Mark Gongloff  |  Posted: 03/21/2012 3:09 pm Updated: 03/21/2012 3:09 pm

Bernanke Stress Tests
Ben Bernanke is making you believe in the banking sector, with his mind.

When it comes to making the markets feel confident in banks, Ben Bernanke is a Jedi master.

On Wednesday the Fed chairman, who shares facial-hair characteristics with Obi-Wan Kenobi, told Congress that U.S. banks were not the zombie banks we were looking for.

To use another metaphor, America's banking sector is no longer a rickety haunted house of hidden financial disasters waiting to scare us all to death, as it was before the financial crisis, Bernanke told a congressional panel investigating Europe's debt crisis.

“AIG is an example of what we don’t see now,” Bernanke said, referring to the massive credit-default-swap losses at American International Group that took everybody by surprise and nearly melted the global economy down to the core of the earth.

See, looky here, we just ran some stress tests on the banks, Bernanke said (I'm paraphrasing). They were really stressful, these tests, and everything was pretty much fine. We even sort of failed a few banks this time. That is just how gosh darn stressful these tests were. Not like the other ones!

The stress-test results allowed many banks to give a little something-something back to shareholders in the form of dividends and share buybacks, a confidence-booster that has helped drive bank stocks higher. That makes banks look even healthier, which means they're even more likely to attract more capital and maybe survive another crisis.

The same thing happened with the first round of stress-test results back in the spring of 2009. Analysts decried the tests as not nearly stressful enough, even as the Fed forced several banks to raise more capital as a result of them. But those tests were enough to make markets think they had their arms around the banks' potential losses, which made them go out and buy bank stocks.

This is how the Jedi mind trick works with the banking sector: The Fed and Treasury say banks are fine enough, and investors believe them. That makes the banks a little more actually fine than they were before.

Whitewash, rinse, repeat.

Ah, but not everybody believes.

For example, Forbes's Stephen Gandel wrote today that Wall Street analysts think the Fed gave a couple of regional banks, Regions Financial and Zions Bancorp, an easier time in the stress tests than other banks so that Regions and Zions could pay back TARP money more quickly.

This follows criticisms yesterday from former FDIC chair Sheila Bair, in a Q&A with MarketWatch, that the stress tests did not focus enough on bank leverage.

That comes after criticisms in a Bloomberg View piece on Monday from former IMF chief economist Simon Johnson, who said the stress-test's worst-case scenario fell short because it only took into account the possibility that one European bank might fail and assumed that interest rates would stay low.

Johnson also said letting banks give away their precious capital to shareholders was a dangerous mistake.

"The Fed's approach on the stress test, letting the banks pay dividends, was awful, insane," Johnson said in an interview with The Huffington Post. "We should be building up capital in banks as buffer."

Nearly a week before Johnson's column, Jonathan Weil at Bloomberg also gave the stress tests a big fat "F," also picking on Regions Financial, saying it doesn't currently have enough capital to cover potential market losses on its loan portfolio.

Regions has said that its passing grade on the stress-test "demonstrates the strength of our company."

Anyway, these critiques have not really done much to slow down the rally in bank stocks. Regions Financial shares are up nearly 15 percent since the stress tests and are up 2 percent on Wednesday. Zions shares are up nearly 14 percent. Bank of America is up 16 percent. Even Citigroup, which sort of failed the stress tests -- a characterization the bank hotly disputes -- is up nearly 4 percent.

Ben Bernanke remains the Jedi master -- at least until reality tests the banks again.

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