More on Reggie Middleton's Bank Stress Testing

By: Reggie Middleton | Wed, Apr 8, 2009
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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.

My stress test numbers will use the governments (already antiquated and inaccurate numbers) only as a point of reference, but will include more realistic projections in order to determine a more accurate outcome. I will start with the members of the Doo Doo 32 that have forensic analysis on this site - for subscribers only.

Taken from the Bureau of Labor Statistics:

Data extracted on: April 8, 2009 (12:18:52 AM)
Labor Force Statistics from the Current Population Survey
Series Id: LNS14000000 Seasonal Adjusted
Series title: (Seas) Unemployment Rate
Labor force status: Unemployment rate
Type of data: Percent
Age: 16 years and over

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
1999 4.3 4.4 4.2 4.3 4.2 4.3 4.3 4.2 4.2 4.1 4.1 4.0  
2000 4.0 4.1 4.0 3.8 4.0 4.0 4.0 4.1 3.9 3.9 3.9 3.9  
2001 4.2 4.2 4.3 4.4 4.3 4.5 4.6 4.9 5.0 5.3 5.5 5.7  
2002 5.7 5.7 5.7 5.9 5.8 5.8 5.8 5.7 5.7 5.7 5.9 6.0  
2003 5.8 5.9 5.9 6.0 6.1 6.3 6.2 6.1 6.1 6.0 5.8 5.7  
2004 5.7 5.6 5.8 5.6 5.6 5.6 5.5 5.4 5.4 5.5 5.4 5.4  
2005 5.2 5.4 5.2 5.2 5.1 5.1 5.0 4.9 5.0 5.0 5.0 4.8  
2006 4.7 4.8 4.7 4.7 4.7 4.6 4.7 4.7 4.5 4.4 4.5 4.4  
2007 4.6 4.5 4.4 4.5 4.5 4.6 4.7 4.7 4.7 4.8 4.7 4.9  
2008 4.9 4.8 5.1 5.0 5.5 5.6 5.8 6.2 6.2 6.6 6.8 7.2  
2009 7.6 8.1 8.5                    

From Bloomberg:

April 8 (Bloomberg) -- A congressional panel overseeing the U.S. financial rescue suggested that getting rid of top executives and liquidating problem banks may be a better way to solve the economic crisis.

The Congressional Oversight Panel, in a report released yesterday, also said the Treasury may be relying on too rosy an economic scenario to guide its $700 billion bailout (Ya' think???), and declared that the success of the program after six months is "mixed." Three of the group's members disagreed with at least some of the findings.

"All successful efforts to address bank crises have involved the combination of moving aside failed management and getting control of the process of valuing bank balance sheets," the panel, headed by Harvard Law School Professor Elizabeth Warren, said in its report.

Depth of Downturn

In the report, Warren's panel said "it is possible that Treasury's approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth." That would be my bet! Like I tell my sons, "When there are no transactions, the bid IS the market!"

The group said it was offering an examination of "potential policy alternatives" for the Treasury and not endorsing any shift at this time.

Still, it said a bank liquidation would be "least likely to sap the patience of taxpayers" and "provides clarity relatively quickly" to the markets.

"Allowing institutions to fail in a structured manner supervised by appropriate regulators offers a clearer exit strategy than allowing those institutions to drift into government control piecemeal," the report said.

The report also said that past successful financial rescues were accompanied by governments' "willingness to hold management accountable by replacing -- and, in cases of criminal conduct, prosecuting -- failed managers."

Separate Findings

Two of the panel members, New York State Superintendent of Banks Richard Neiman and former New Hampshire Senator John Sununu, issued separate findings.

"We are concerned that the prominence of alternate approaches presented in the report, particularly reorganization through nationalization, could incorrectly imply both that the banking system is insolvent and that the new administration does not have a workable plan," the two wrote.

Sununu and the five-member panel's other Republican appointee, Representative Jeb Hensarling of Texas, dissented from the entire report.

The oversight panel was set up under the rescue law passed in October. It has three members appointed by Democrats and two by Republicans. The group's reports are required by the legislation.



Reggie Middleton

Author: Reggie Middleton

Reggie Middleton

Reggie Middleton

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