Stress Tests Fabricated to Produce Bullish Surveys
The U.S. Treasury will unveil it much anticipated “stress tests” of the banking system next month and investors are anxiously awaiting the results. But we all know that most banks will indeed pass this survey since anything short of a positive survey will smash bank stocks down again.
In my view the stress test survey is just a “show” for the investment markets and in the end really doesn’t mean very much because credit quality is still deteriorating. Bank balance sheets remain highly vulnerable to more losses later this year, including credit cards, commercial real estate, home equity loans, residential mortgages and commercial/industrial loans.
To assume – seriously assume – that we’ve seen the worst is a mirage because employment and domestic consumption trends have collapsed. Just how the economy is supposed to swiftly recover without credit expansion is almost impossible. Banks are not lending.
On Friday, federal bank regulators are expected to start sharing preliminary results of stress tests with nineteen banks surveyed since February. I’m sure Goldman Sachs, US Bancorp and Well Fargo will lead the pack on the upside since these banks are probably the best of the rotten bunch.
A few observations are worth noting since anything short of brutal clarity or full transparency will be deemed a total joke by the bears – still negative on bank earnings in 2009-2010.
If there’s one bank that truly deserves to fail a stress test it’s Citibank (NYSE-C).
Once the most venerable of global banking brands and one of the largest global financial institutions based on its stock market capitalization prior to the outbreak of subprime in August 2007, Citi is insolvent. The bank is bleeding losses almost across its entire range of businesses and if it passes the government’s stress test then you know the financial system is doomed by false accounting, lies and the failure of executives and government alike to put this bank into receivership. Frankly, that’s already the case for months; yet a stress test survey showing that most banks are adequately capitalized will be a mockery of the real situation. Banks need more capital.
A few weeks ago, the FASB, under Congressional pressure, loosened the reporting requirements on mark-to-market accounting. This change basically allows CEOs and CFOs to assume asset values. That’s certainly not proper accounting – yet several banks, including Well Fargo saw their Q1 earnings boosted by this accounting change.
The whole financial system is a mess and the government and banking executives have made a dire situation even worse. Sometimes, you’ve got to wonder if anybody has a clue or a handle on this credit depression. After twenty months of bleeding and the massive destruction of wealth we’re still no closer to the bottom.
In my view the stress test survey is just a “show” for the investment markets and in the end really doesn’t mean very much because credit quality is still deteriorating. Bank balance sheets remain highly vulnerable to more losses later this year, including credit cards, commercial real estate, home equity loans, residential mortgages and commercial/industrial loans.
To assume – seriously assume – that we’ve seen the worst is a mirage because employment and domestic consumption trends have collapsed. Just how the economy is supposed to swiftly recover without credit expansion is almost impossible. Banks are not lending.
On Friday, federal bank regulators are expected to start sharing preliminary results of stress tests with nineteen banks surveyed since February. I’m sure Goldman Sachs, US Bancorp and Well Fargo will lead the pack on the upside since these banks are probably the best of the rotten bunch.
A few observations are worth noting since anything short of brutal clarity or full transparency will be deemed a total joke by the bears – still negative on bank earnings in 2009-2010.
If there’s one bank that truly deserves to fail a stress test it’s Citibank (NYSE-C).
Once the most venerable of global banking brands and one of the largest global financial institutions based on its stock market capitalization prior to the outbreak of subprime in August 2007, Citi is insolvent. The bank is bleeding losses almost across its entire range of businesses and if it passes the government’s stress test then you know the financial system is doomed by false accounting, lies and the failure of executives and government alike to put this bank into receivership. Frankly, that’s already the case for months; yet a stress test survey showing that most banks are adequately capitalized will be a mockery of the real situation. Banks need more capital.
A few weeks ago, the FASB, under Congressional pressure, loosened the reporting requirements on mark-to-market accounting. This change basically allows CEOs and CFOs to assume asset values. That’s certainly not proper accounting – yet several banks, including Well Fargo saw their Q1 earnings boosted by this accounting change.
The whole financial system is a mess and the government and banking executives have made a dire situation even worse. Sometimes, you’ve got to wonder if anybody has a clue or a handle on this credit depression. After twenty months of bleeding and the massive destruction of wealth we’re still no closer to the bottom.
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