The Stress Tests Fail The Smell Test
The results of the much-anticipated bank stress tests are finally set to be released on Thursday -- after the markets close. But we can already give the Obama economic team a grade for the way the tests have been handled: F.
For starters, why the holdup in releasing the results? It's been ten days since the Treasury Department and the Fed let the banks in on the preliminary results of the tests. So how come the public -- you know, the ones who keep bailing out the banks -- are still, ten days later, in the dark?
The reason is, the banks are using this time to negotiate how much information about their portfolios the hoi polloi will be privy to, and are trying to get the government to reconsider its analyses (which are already iffy, since they are based on the banks' own estimates and on assumptions about the economy - including unemployment rates, and cumulative real estate and credit card losses -- that are hardly stress-inducing). This is the equivalent of a teacher giving a student a look at his grades and allowing the student to try to cut a better deal before report cards are sent home to mom and dad.
It shows how out of whack the power dynamic is when it comes to the administration and Wall Street. In the natural pecking order, regulators are above the regulated. They don't ask for permission. And they certainly are not worried about ruffling any feathers.
But for some reason -- the Wall Street-centric bias of Tim Geithner and Larry Summers, perhaps, or, as Joseph Stiglitz puts it, the government's confusion of "the notion of too big to fail with the notion of too big to be financially reorganized" -- the banks continue to hold the upper hand (see the cramdown debacle).
The delay in releasing the test results also opens the door to potential funny business, with some troubling insider-trading scenarios and a huge payoff, as David Min at the Center for American Progress points out.
We've already seen Goldman Sachs raise eyebrows with its sale of $2 billion in non-government-guaranteed bonds last week -- a move that sidestepped its agreement with the government not to disclose the results of its stress test, instead sending a signal to investors that there was no bad news in the stress test for Goldman. Of course, Goldman's receipt of $10 billion in TARP funds and $29 billion in bonds backed by the FDIC might have something to do with how well it is doing.
Goldman is typical of the banks' have-it-both-ways approach. By announcing its intention to repay the TARP money it received (thus freeing itself from government compensation restrictions) while continuing to issue government-backed bonds, the banking giant is acting like a man who wants all the benefits of being married while still being able to slip off his ring and have an affair anytime he feels the urge.
And then there is the trouble with the assumptions at the heart of the stress tests. As Nouriel Roubini put it: "These are not stress tests but rather fudge tests... The results of the stress tests -- even before they are published -- are not worth the paper they are written on."
Nassim Taleb agreed: "This stress test is the equivalent of testing the Brooklyn Bridge by running a single heavy truck on it."
The ongoing horse-trading between the banks and the government has only exacerbated the mistrust, creating what the New York Times' Andrew Ross Sorkin, appearing on Charlie Rose, described as a lose-lose:
"Either you are going to be very realistic, perhaps even too realistic for many people, and you're going to suggest that some of these banks really are insolvent...or you're going to decide that the entire process is a whitewash and you're going to have no confidence in the test to begin with."
When it comes to assessing the health of America's financial system, can there really be such a thing as being "too realistic"? Tim Geithner clearly thinks so. So we are left with the whitewash verdict -- putting us pretty much right back where we started.
"This financial crisis," wrote Roubini, "was one due to opacity and lack of transparency in financial markets and due to regulators that were asleep at the wheel. But now the administration officials and regulators have decided to add to the fog of opacity by adding to the lack of transparency in financial markets."
And that lack of transparency extends to the artificial choices we are being offered. The way the financial crisis has been presented, there are only two alternatives: either taxpayers keep funneling endless billions into the banks or the banks go under.
But there are other options -- options that are infinitely better for taxpayers -- that are not even being considered.
The simplest and the most sensible option -- converting debt into equity -- was neatly laid out on Charlie Rose by hedge fund manager Bill Ackman:
"What's interesting is that the banks in this country have all the capital they need. The problem is too much of that capital is in the form of debt, not enough is in the form of equity. The way we solve that problem typically in America is through a reorganization process, where a judge adjudicates a bankruptcy or some other form of conservatorship or reorganization. They figure out the value of the firm. They figure out how much equity needs to be raised and they compromise with the bond holders until the bond holder end up owning the firm." Ackman called this "a classic restructuring approach."
Then why isn't this classic approach -- forcing bondholders to take a haircut -- even on the table? Joseph Stiglitz says it's because bondholders "would prefer the taxpayers giving them money... And their voice has been heard very clearly. But it's not in our national interest."
Once again the question comes down to who is supposed to take the risk: taxpayers or investors?
The rules of capitalism are clear on this: the burden must be borne by the investors who, looking for big profits, assumed big risks. Geithner, Summers, and the banks prefer rewriting the rules so that investors get the upside and taxpayers the downside.
That's not capitalism, and it shouldn't be allowed to continue. Just as the banks should not being allowed to call the shots on everything from cramdowns to the stress tests.
The Obama administration's ongoing loyalty to Wall Street is a virus that holds far more danger than the swine flu (sorry, the H1N1). And the fact that the stress test results to be released on Thursday are unlikely to show the full extent of the sickness of our financial system is one more symptom that Obama's economic team needs to be put in quarantine -- and replaced by people willing to put the public interest ahead of the interests of Wall Street.
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Nothing new here
You can not rely on Government accounting statistics
Here's a good article from someone who actually saw the crash coming, Kevin Phillips, describing how they hide the real economic data from the public and how we were heading for a crash
http://www.harpers.org/archive/2008/05/0082023
And you can rely in ideologically blinded pundits who have no data at all to tell you the truth?
The fact is, the economy is coming back without nationalization of banks. It wasn't necessary. Get over it.
Ummm did you read the article?
Phillips is a conservative . He is not arguing for any kind of nationalization
STRESS TEST = A GOOD LOOK AT ALL THE BOOKS AT EACH BANK !!!!!!!!!!!
Dick Durbin, "They own the place". why all the suprise when the stress test, is designed to test the stress on the American people, for their ability to swallow this BS. Durbin got it right, the Banks rule, and we are all Pyramid Builders.
Lary Waldman
It's the "Sniff Test". The Banks already Smell.
Perhaps you would prefer our last administration to this one? I get so tired of the constant carping about everything he does. One columnist is "deeply disappointed"; the founder gives him a grade of "F"; he's not moving quickly enough on this issue or that problem. Honestly, to read the articles and comments around here, you'd think he was either as incompetent as the last guy or secretly trying to ruin the country. I'm not saying we should support him blindly (like some people we know), but wow, we could at least try to keep things in perspective and sound a little less sanctimonious. There are a lot more factors in all these issues than any of us have any idea, and I for one, can't think of a more rational mind or steadier hand that I'd want behind the controls.
I'm sorry, it's just not enough to say that Obama is better than George Bush.
We hold him to a higher standard because we didn't vote for a status-quo that we can believe in.
We voted for change.
Senator Durbin said it best this past week with his comment that "they (the banking industry) run the place", meaning Washington.
In an interview with Bill Moyers, Senator Durbin gets to the heart of the matter with the comment
"If you want to get to the heart of this, it's the way we finance our campaigns for the United States Senate and the House of Representatives. It's time for us to move to public financing, for the good of the country."
This statement has been repeated over the years by politicians as diverse as Arlen Specter and Joe Biden, John McCain and Russ Finegold:
If we ever expect to see real change in Washington we have to change how it is financed.
So yes, we expected more from this President than business as usual.
We expected, and still expect, real change.
He may be a fine and intelligent man, but the President doesn't create much distance between himself and W when he continues to enlist the foot soldiers of that criminal administration.
It is clear at this point that Obama is merely a continuation of Bush. He's just a more liberal version. What happened to ending the war and bringing the troops home? What happened to not letting lobbyists run rampant in your administration? All of you that voted for "change" got suckered and betrayed by another slick, lying politician. You should be outraged.
Why is everything that Obama's economic team does seen as some nefarious plot from the right and some socialist takeover from the right?
The plain, boring truth is that Obama is trying to restore public confidence in the financial system and stimulate the economy. Once the economy stops hemorrhaging, he plans comprehensive reform of the financial sector. Meanwhile, he salvages what he can from the auto industry without allowing it to drag the US into a deep depression.
Obama has been playing it safe, knowing that saving the economy is his key to the 2010 and 2012 elections. He also knows that restoring the economy will give him enormous political clout and allow him to make the reforms that Leftist are calling for right now.
Apparently, Leftists learned nothing about Obama from his campaign last year. While they called him too safe and boring, he made his opponents look off-balanced by contrast. He allowed Clinton and McCain to self-destruction while he remained calm under pressure. He is applying the same techniques to his administration, and in case you haven't noticed, a 19 month recession seems coming to a quiet end.
Arianna- I do not agree with you about a lot of things but you are spot on when you say investors should bear more risk. I common shareholders of many (if not most) of the TARP banks should have been totally wiped out. And I found it astounding that this stress test information could dribble out in the fashion it did. There is no doubt that these test results constituted material nonpublic information; SEC rules are very clear that it is illegal to trade off of such information. Just ask Martha Stewart. And yet it is clear many traders were able to glean information through the grape vine and place their bets before the test information was officially disseminated. Egregious.
Whatever WALL STREET wants it gets & screw MAIN STREET.
The only thing changing is the debt burden put on our grandchildren.
This is precisely why I believe, and there are books on the market right now with political scholars espousing that there will be a third party in this country. Our government for too long has been run by puppeteers of special interests, corporate and financial empires have Congress, the Executive and those nominated to the Federal bench in their hip pocket, and put Americans last on their laundry list.
RON PAUL knows the truth & told the truth about the FED
There are scholarly books about "THE MASTERS OF THE UNIVERSE" & the FED, but that
hasn't changed a thing.
It's like trying to get rid of roaches when the exterminator wants them there.
Libertarians have no business on public roads, no business calling the police to help them with criminals, no business visiting national parks, no business collecting social security, no business applying for medicare, etc. If you don't want to pay for anything from the government, then keep your selfish hands off of what it provides, and finally fight wars on your own.
We need to make the Fed a publicly-run institution; we need to regulate the banks, Wall Street, and other financial institutions, and re-instituting the Glass-Steagall Act of 1933. We need to outlaw lobbyists' gifts and contributions; we need to set a low ceiling on campaign contributions of any kind. We need to get Big Money out. We need to reform our gigantic money-sucking military, our gigantic money-sucking secret agencies and deeply regulate those we keep. We need to become a democracy in which the government is the government of everyone. The rich won't like that; the businessmen won't like that, unless they're little businessmen. To exist, markets need good strong honest government regulation; roads, airports, cities and their services, public health--all these require government regulation and public money: thus, libertarianism is untrue.
I think some of you misunderstand libertarianism. I'm not going to try and explain it here, but maybe check out cato.org or mises.org or campaign for liberty for more info in that.
The main point here is about the Federal Reserve and our monetary system. It is unconstitutional and therefore illegal.
Let's take a look at the Constitution:
Article I, Section 8:
"The Congress shall have Power To... coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures"
Note that it says "Congress". Not a banking cartel. And what's all that about "Weights and Measures"?
Article I, Section 10:
"No State shall... emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts"
Pretty self-explanatory. But what does it mean by "Bills of Credit"?
I found this definition at http://www.lectlaw.com/def/b099.htm
"Such bills of credit are declared to mean promissory notes or bills issued exclusively on the credit of the state, and for the payment of which the faith of the state only is pledged." Gee, sounds an awful lot like our current system doesn't it?
What we need to do is abolish the Fed and get back to Constitutional money (a.k.a. the gold standard).
I see the Banks, Corporations and their lobbieests got to Obama early in his first term. It took them until the second term to get to Bill Clinton and he laid a big egg with NAFTA.
I guess the holdovers, Geithner and Summer, did the job Goldman Sachs trained them to do and Obama went sheepishly and trustingly along with these two "bankimg industry representatives" or should we call them 5th Columnists. I wonder how long it will take for Obama to wake up and find new financial help. There are enough unemployed financial experts around..
Barack Obama: You are losing us Progressives.
Speaking of Squawk Box, Barry Ritholtz has a new book coming out called Bailout Nation. he is the CEO and Director for Equity Research for Fusion IQ and his site is www.ritholtz.com. He should be one of your top four. He knows what he's talking about and should probably be a guest on "REAL Time" with Bill Mahr. His no-nonsense financial talk is frank and insightful.
My sentiments exactly. Even if the stress tests were far worse than what they tell us, you don't think they would incite a panic de ja vu 1929 Bank Holidays. That's why your issue of trust is so huge and disappointing, that Obama would be in bed with who brought us so much grief.
Don't forget the financial sector pumped 117 million bucks into the campaign of "Mr. Cange that Matters."
Who says he's going "to wake up?" He's already showed his hand. His hand is holding the hand of Wall Street. We need a third party. We need to elect representatives who represent only us and not lobbyists. For that, we need campaign finance reform, honest elections, accountability, investigations, a newly structured media (dismantle these mega-media companies that lie to us), a drastically reduced defense and secret agency budgets, etc. etc. We need health care (I'm paying over $1,000 premiums and only make $20,000) in a single-payer, government-run, package like Medicare is now. We need to stop Obama, the DNC, the RNC, John McCain, Rush Limbaugh, the Bankers, the rich and Super Rich, and Wall Street and our élitists from destroying life for the little people... In other words, we need to take back our government from them.
I agree, Captain. But how do you propose we do it?
Despite the great speeches...........
It turns out that Barack Obama is EVERY BIT AS CORRUPT as George Bush.
The American people ..............ALL THE AMERICAN PEOPLE.........have been betrayed again.
Why did we not vote for Dennis Kucinich or Ron Paul? Only those two were honest enough but
were dumped by the media and we all fell for it. I went for the majority since my vote for Kucinich
would have been wasted. But in the future we need to become a lot smarter when voting, really
look at the issues. Seems like the tax cut for middle class is a ruse too. The IRS has not adjusted their tax tabled, so in the end next year we will have a big surprise and have to give back the little money extra we enjoy now.
Go to gradegov.com . It's fun to see how people grade their elected officials..Ron Paul got an A
"Ron Paul and Kucinich were dumped by the media." This is very true. We need a Third Party. Hit the streets; protest loudly....
You haven't plumbed the depths of George Bush's corruption. At that, corruption is a harsh word. I'm sure Bush regarded it as loyalty to his friends even as he judged them by what they could do for him. Remember Enron. Remember the big pay out before the CPA "handed over" the reins of government in Iraq. Remember that TARP cannot follow all the money Paulson forced upon the banks.
Ron Paul and Dennis Kucinich have a certain intellectual appeal as one is a libertarian and the other an earnest populist. Kucinich failed badly as Mayor of Cleveland. Deregulation is a libertarian's deepest passion, and we've all seen how that disarms popular government and licences corporate corruption.
The worst one can say about President Obama is that he is too considerate of Republicans.
The worst that I can say is the he is a JUDAS GOAT leading us to slaughter.
During the campaign only one blogger that I'm aware of called Obama a TROJAN HORSE.
I made the mistake of voting for him because I wanted to believe his rhetoric.
As soon as he started filling his cabinet with Bush criminals, I knew I was duped.
Escalating the war in AFGHANISTAN was another blatant example of bait & switch.
Another great item from Ms Huffington. I wonder, do people at the centre of power, such as the White House, read these gems? As a foreigner observing what goes on the the USA, I also wonder what it would take to get the American people really angry enough to make their views felt and to demand fairness? Protests against the very costly (in every meaning of that word) war in Iraq had no impact; so, perhaps that's why we don't see big demonstrations against the use of tax-payers' funds to allow bankers and other privileged people to retain their cosy conditions while thousands of ordinary folk lose homes, jobs, etc. Are President Obama's supporters too scared of undermining him by pointing out the flaws in his approach to dealing with the mighty bankers? While this president is a breath of fresh air, and he must be given a chance to achieve change, he must also, surely, be regularly challenged to keep his promise to bring about a more just society? His appointment of Summers et al, and their immense continuing influence (and pro-Wall Street bias), suggest a serious weakness in the Administration's commitment to real change.
We're broke, overworked, exhausted, and homeless. I'm angry because I feel helpless to change anything, and how can I afford to demonstrate? I have no time and no money to travel.
Very true. It is amazing that we can have 'tea parties', where people protest the Obama administration's spending policies, but where the vast majority of attendees entirely missed the point of who the real villains are. They end up protesting a relatively small tax hike for the very class that abused the system during the Bush years. It seems that such protests get it about 20% correct, and 80% of their rage is misdirected and manipulated by the very people who have sapped our economy into its current state.
Throughout history there have been bloody revolutions for far smaller transfers of wealth than what we have witnessed in the last 8 years. Unfortunately, in America today, the majority of adults have no real idea who they should be revolting against, nor do they really understand how their predicaments came to pass. We may end up having civil unrest in the upcoming years, as our economy comes to resemble that of Mexico, but I fear that the rage will simply be the poor and formerly middle class attacking each other, probably along racial and ethnic (hispanic) lines.
Begin with your friends and your neighborhood and your City Council. You don't have to protest all the time. Just a few big protests. Protest in front your local television and radio stations that don't report anything important or spin and lie about that which they do report. A protest? Should be noisy, loud, obnoxious, and very impolite. Bring your cellphones, digital cameras, and videocameras. Take pictures of the powerful abusing you. Join freepress.net to stop the élitists from destroying the internet.
We know our government is controlled by Wall Street. That's old news. Treasury and the FED have been supporting Wall Street too. That's called reciprocity. Anyone with a better idea?
Voters can hardly read, so don't expect much help from them.
You're smart enough to know that there are lots of better ideas.
A very fine article Ms. Huffington!
I thought the last paragraph especially was worth repeating, if I may:
The Obama administration's ongoing loyalty to Wall Street is a virus that holds far more danger than the swine flu... And the fact that the stress test results to be released on Thursday are unlikely to show the full extent of the sickness of our financial system is one more symptom that Obama's economic team needs to be put in quarantine -- and replaced by people willing to put the public interest ahead of the interests of Wall Street.
Thank you,
dp
A2
Give the administration a break guys...Arianna too. The administration has received a report or reports and need to check the facts and challenge them before they release them to the public. I'm a retired accountant and CFO and I would never release information to the president of my company without checking it's accuracy and understanding its nuances. Patience is a virtue... not known in politics. I'm a true liberal and have difficulty with "Progressive" impatience...in fact don't quite understand the name and it's origins. So I quite often have to challenge your positions.
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