Saturday, May 2, 2009

Don't stress about stress tests

All this talk of stress tests! The whole thing is silly. Similar to having a student (bank) and teacher (government) negotiate a grade for a report card. Another silly idea by Geithner that will do little to impress anyone.

A true stress test would find most financial institutions in the US to be insolvent. The "adverse" conditions laid out in the stress tests are a base case, while the base case is a joke (2010 unemployment at 8.8%, near current rates- even if you think that the economy is going to grow in 2010, unemployment usually peaks for 2 years after a recovery).  There are so many assumptions involved that the test is being rigged.

Anyway, I think that the market is smarter than the stress tests, and that these stress tests will be a tool for government to either put more money in the banks or force the banks to do things that they may not have done otherwise. The bad banks (C, BAC) will need to raise money, but the market knows this. The market may well yawn at the results of this rigged stress test. I believe it is heading down anyway, and perhaps reporters will assign blame on the test, but I think much of the test has been leaked and dismissed as a big joke anyway. The real surprises are usually hard to forecast. Perhaps the banking sector surprises are going to come from non-US banks (Canada or Europe?), I believe, and they will not be telegraphed.

Right now, everyone thinks that JP Morgan and the Canadian banks walk on water. Somehow, I doubt that when this recession is finally over, people will be saying that. 
That is the history of these things.

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