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September 17, 2009

Why Hasnt Anybody Questioned Those Rosy Stress Test Results Now That the Facts Have Played Out?
by Reggie Middleton

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???

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

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