Stressless Tests: Our Treadmill Of Delusion
What if you were worried about your heart and your doctor said he wanted to perform a "stress test" on you - then he sends you home to fill out a questionnaire. Upon returning the questionnaire, you steel yourself for the physical exam, the EKG, the treadmill, and all the other stuff you've been reading about. But he quickly looks over the questionnaire, blesses you with a clean bill of health and says good-bye. Would that feel right? I hope not.
But that's exactly the approach we're taking with the banking system. As if we can just think this problem away - if we close our eyes and don't think too negatively, the problem will subside. That is: feeling OK is the same as being OK.
Last week at the Milken Institute Global Conference, this theory was illustrated for me in living color - literally. Certain things were "on the table" for discussion - such as when real estate prices would return to their glory days and when the financial boom of yesteryear would return. But the question of if they would was unspeakable; asking such a silly thing felt gauche. This terrible slump we're in is just a momentary condition, they said. And reliably, every time I saw a PowerPoint slide with a graph that endeavored to project the next few years of economic activity, there was a beautiful upward ramp (usually green or blue) just around the corner. I saw it so much that I started calling it "The Blue Phoenix."
No one thought it was funny.
Now, while we all hope it's true, we must also be responsible enough to entertain the idea that it may not actually be true. If we don't, we are just being delusional.
And the methodologies used for the bank stress tests are delusional indeed.
In the model, banks are "asked to estimate" and "instructed to project" losses for "baseline" and a "more adverse" economic scenario. The "more adverse" scenario is the Federal Reserve's version of a worst-case scenario. That scenario has United States GDP growing by 0.5% next year. That's right, folks - when it comes to conceptualizing how badly things could go over the next eighteen months, 0.5% growth actually represents the outer bounds of the Federal Reserve's imagination. That ought to disturb all of us.
To be fair, the Fed says in the white paper that the "more adverse" scenario it is not intended to be a worst case scenario - it's just supposed to be "severe but plausible." In other words, it's the worst scenario they are willing to entertain in pleasant company.
Further, the Fed says analysis is intended to be "...forward looking [with] losses and resources projected over a two-year period." I'm reminded of the absurdity of the media and marketeers fawning over Bernanke's optimistic remarks yesterday. Given that Bernanke, the Fed, and the big banks never saw any of this coming, we're now expected to rely on their ability to predict the future? This, when we know the banks themselves are basically authoring the test results?
Further, the tests mostly overlook derivatives - the $50 trillion elephant in the room - by essentially letting banks apply their prior calculus in valuing them.
Shall we rest soundly on their collective optimism, especially in light of their track records?
Here's the truth: many of our largest banks are insolvent, and their only hope for recovering is for the US economy to stage a roaring comeback - indeed, an unprecedented comeback - and to do so very quickly. While we all want that very much, we also need to accept that it's exceedingly unlikely.
More truth: The FDIC has about $50 billion in reserves - ostensibly insuring 8,000 banks and more than $7 trillion in customer deposits. Just the top 150 banks have deposits exceeding $2 billion each. Hundreds of institutions sit on the FDIC's internal list of troubled banks. Probably ten to twelve of the big banks will need to raise more capital.
Additionally, several of the largest banks have exposure to derivatives that exceed their total assets - in some cases, they exceed a given institution's asset base several times over. No amount of rosy projection is going to change the reality that a very large number of these contracts will ultimately turn out to be worth nothing - that's right: $0.
So, the remaining question is: where is all that money going to come from?
The answer: probably you.
How's that heart feeling?
Government Offers Details of Bank Stress Test - NYTimes.com
Bank Stress Test May Expand Regulators' Role - NYTimes.com
Bank ‘stress test' draws fire from critics - Eye on the Economy ...
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
Mr. Citrano, please look at the glass as half full. Prices on Chrysler and GM cars will soon be very attractive. After California files bankruptcy and layoffs a ton of people this summer, there will be less traffic in the golden state. U.S. currency can double as toilet paper. An oligarchy requires less involvement by the proletariate. No need to go to Las Vegas, just invest in a 401k. Now Anthony, close your eyes and click your heels and say, "I am ok, you are ok, everything is ok".
"The "more adverse" scenario is the Federal Reserve's version of a worst-case scenario."
--
No, the "more adverse scenario" is the Federal Reserve's version of a more adverse scenario. Also, banks are certainly not using "their prior calculus" (whatever that means) in valuing derivatives. An attempt is being made to assign a value to differently rated tiers of bundles bonds, mortages or other assets taking financial data from the last six months into account. Should we not do that and just assume everything called a derivative is worthless? Does that sound like the truth?
I'm certainly no advocate for returning to the business climate of last year. In fact, I'd like to see a lot of New Deal legislation after employment stabilizes and begins to rebound. I just hate to see all of this nonsensical criticism for its own sake. It doesn't advance the process of reorganizing the banking/insurance/hedge fund system to wave torches and pitchforks at it and yell.
Along with many other people, I am now going to get bent out of shape about a HuffPost article title. How can you claim that the 'stressless tests' are 'delusional' because they weren't worst case scenarios and then state further along that 'to be fair,' the tests weren't even supposed to be worst case scenarios? It looks to me like auditors based the viability of banks on a set of well defined conditions. If you would like them to perform a different test, that's ok but that doesn't invalidate this test.
Wow! That's a lot of truth in such a small space. I guess it helps that Anthony Citrano ("analyst / agitator / photographer") doesn't take up a lot of space explaining why these things are true or qualify terms like 'roaring eoonomic comeback.' What constitutes roaring? 5% growth next year? As far as I know, that's well within projections of even the Cato Institute.
0.5% growth. 5% would be roaring by anyone's standard.
Geithner, Obama, Bernanke, Summers -- they've all gotten into the confidence game, along with Bernie Madoff and the banks. Governments should govern. Our government has no business using our money to cover gambling debts, and claiming its for our own good.
As to the guy who says paying off credit cards would make the banks solvent, quite the opposite -- the illusory profits they've claimed of late is in large part based on people NOT paying off their credit cards.
Social democracy has it all over the corporate cronyism that governs the USA now.
See Dr. Alex Benzer's Profile
On point, my friend. Now the trillion-dollar question: how can we, as citizens, return some accountability to this morass? Worse than murder, the banks are on the brink of getting away with failure in plain sight.
This simply not true. The banks have lost a simply gigantic amount of money. The TARP is a loan; it is not a gift. Going forward the banks will face more stringent regulation, and their executives will face both lower pay and higher taxation.
Praying the failure be more colossal does nothing other than doing horrendous harm to tens of millions of Americas who right now have jobs and homes and families. It's like your hatred of the bankers is so extreme that you would do immense damage to these innocent Americans just to see the wooden stake stuck through the heart of financial community.
Grow up, doc.
Grow up yourself; you're a broken record spinning the same old disinformation that no one believes anyway....
Paying your credit card bills would be a good start, my friend. Then you need to think about ways of paying back your home loans... faster than on 40 year terms.
Good luck. Most of you will need it.
You label people as hateful, then automatically assume their credit/loan situation as troublesome,with no information regarding their finances. Geeeez.
Agitator? Wow... the most honest self description I have seen by any HuffPo blogger. Congrats. Someone has balls.
When the rules of the game become too hard or, in this case, too annoying to follow, then our leadership changes the rules so that the game continues. In other words, more people will be suffering from a lack of access to participation in society's economic benefits but the measurements of society's progress will be redefined in order to marginalize the growing numbers of the negatively affected. It'll look good on paper.
To enforce the rules of the game right now would mean that everybody loses. Some people are smart enough to admit that bending the rules somewhat and surviving with a bruised ego might be preferable to sticking to them while riding into the sunset.
I am not so rigid that bending rules is never an option. I am, however, principled enough to know the difference of allowing rules to continuously be corrupted in order to keep failure of an egocentric mindset from acknowledging there are more beneficial and compassionate alternatives than a eugenisistic (not a word, but I bet you can discern the meaning), corporate elitism that tends to first take from and then blame the victims of their excesses. I am by no means an enemy of capitalism. I am however an enemy of distortion of capitalism to create uneven playing fields that create more harm in the long term than good.
Welcome to the lost decade...
Japan made the same arguement about their banks, and they had no progress in business until they bit the bullet and adknowledged what everyone knew, that the banks were bankrupt.
BofA, Citi, and friends are so far in the red that scarlett looks black by comparison. They are defunct, flat broke, holier than a swiss cheese bagel, out for the count, kaput! Either we deal with it, fix our system, and move forward, or we ignore reality and everyone tiptoes around the dead dude in weekend at bernie's land.
If you think pretend world keeps people from knowing what is going on, explain why the banks posting wonderful earnings reports caused their stocks to go down instead of up. Our markets work on transparency of information, and any entity that looks like it is fudging the books won't have investors, lendors, and eventually customers...
KillTheMessenger, I also accept the need for tentativeness. What I see is that we now have a set of performance standards set by the banks themselves. They have predicted what they see happening, so they can be held accountable for failure to achieve those results.
Of course that's not the ideal. The ideal comes with a guarantee. No guarantess. When the Treasury announces, as today, that no banks are insolvent, that means that the US Treasury has put itself (and that is us) on the line to ensure solvency. It is a bet. We are betting that the economy can get moving again.
We know that there is a ton of cash waiting on the sidelines. But an economy needs to run, to move, to exchange, to get active, to take risks, to meet needs. So sitting on the sidelines is to be waiting to die. But it's the first ones who lose that die first. So the paralysis persists. Reducing the risk of those who get off the dime first is what it is all about.
Charles Ponzi would be quite proud of our .gov efforts to date.
Exactly so. Time to stop feeding the delusion, people. Time to start fighting back.
Bzzzt! Nope! Sorry! I see right through it.
This is called "swindle." "Usury." "Fraud." "Deceit."
The truth is not in them. There is simply no truth at all to what they are saying, and, it would seem, everyone knows this but these crooks.
GAME OVER. Busted. Kaput. Bankrupt. Liar liar liar.
There are 305 million of us out here who know that "the slammer" is where these crooks belong, and who are determined to put them there. No more lies. Just shut up: it is over. No more lies.
Exactly. I get sick of all these apologists for the finance, bank, insurance industry posting comments about all the technical financial points. Responsiblity is sloughed off as a mere annoyance to them, always implying that all us non-finance majors could not possibly understand their difficult work. All the complicated financial instruments are essentially built in layers of deception, negligence and passing the buck (literally).
Really...not much has changed since W was feeling his way through the presidency. He influenced our world in more ways than I care to think about...creating illusion where reality used to be, looking the other way when crimes were comitted, keeping issues of morality off the table, no wonder kids are loosing faith in a higher power. There doesnt seem to be one!
"Worthwhile goal"---proclaim good news (and hope it is really good news and not a con job) and avoid panic, but at what price? Hope TRUTH was not sacrificed in order to keep everyone happy.
"People may doubt what you say, but believe what you do."
This what you want.
Your doctor has you come in for a stress tests. He designs one that is certain to kill you dead as doornail. That way he will know for certain that your heart was bad. 'Yup", he says to your grieving relatives, " your guy had a bad heart. Aren't you glad my stress test proved it?"
The stress tests were not rigged. The stress tests were not a scam. The stress tests were reasonably configured to achieve a worthwhile goal. The stress tests have provided useful information and will be helpful as the year unfolds.
It is nothing more than a desperate continuation of a thick layer of lies.
Real business is real. This falsehood is nothing more than an empty shell. Let us have no more of it. Life is too short to waste on nonsense like this. There are hundreds of millions of honest businessmen in this world, and all we really want is for these well-placed but useless liars to be out of our face.
I second that!
Damn dude, the truth hurts...but...well, there it is.
You must be logged in to comment. Log in or connect with
