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Elizabeth Warren Calls for New Bank Stress Tests

Posted by Larry Doyle on February 11, 2010 9:34 AM |

The initial Bank Stress Tests run by Treasury Secretary Geithner were largely a sham. I questioned as much last April in writing, “Bank Stress Tests: Major Sham?”:

As with any test, the results are only meaningful if the process and proctor have unquestioned integrity. The proctors for the Bank Stress Test are none other than Treasury Secretary Tim Geithner and Fed chair Ben Bernanke. Why is a testing authority of the magnitude of FDIC, led by Sheila Bair, not more involved in the process? Ms. Bair is the one individual in our country with the greatest level of interaction with and understanding of the student body, that being the banking industry as a whole and individual banks specifically.

What does the FDIC, led by Ms. Bair, have to say about the upcoming Bank Stress Tests? The New York Post provides a CHILLING perspective:

The stress tests the government are about to conduct on some of the nation’s largest banks is being blasted by insiders at Sheila Bair’s Federal Deposit Insurance Corp., who say it’s a pointless exercise that’s more sizzle than steak.The FDIC’s basic beef with the stress test is that it is not a credible way to assess how much additional cash beaten-down banks will need to weather what many Wall Street experts predict will be more losses in the coming months.

The tests are conducted by the Treasury Department and the Federal Reserve on the nation’s 19 biggest banks, including behemoths Citigroup, Bank of America and JPMorgan Chase.It’s a sham,” one source told The Post, describing the test as an “open-book, take-home exam” that doesn’t actually work.

While Geithner, Bernanke, Obama et al have openly declared victory in saving the banking system, there is a very credible voice in Washington calling for a new round of Bank Stress Tests. Who has the gall to make such a demand?

Elizabeth Warren.

Warren stated as much in a Bloomberg interview I watched this morning. She is calling for new tests, not only for the 19 large money center banks but also the regional and community banks, as well. Why is Warren calling for this reexamination? Her primary concern currently centers on the pending and expected losses within the commercial real estate space through 2013.

When asked how her call for new tests has been received by Tim Geithner and team at Treasury, Warren succinctly used the term, “resistance.”

No surprise there . . . but also no transparency there, either.


  • coe

    It’s difficult to have one’s cake and eat it at the same time. With all of the examination and capital regulatory pressure raining down on the banks on one side, there is the incessant call to lend more on the other. To nobody’s surprise, the administration has declared a moral victory with the flawed results from the first round of stress tests on the biggest banks, and certainly do not want to open a new can of worms that might reveal these tests were not at all accurate predictors of systemic risk a mere few quarters later. All banks are subject to varying levels of “stress testing” (eg – liquidity, interest rate risk, credit) under the current regulatory regimen as is. Isn’t it true that these models are by definition flawed – by the quality of the input, by the assumption driven math, by the “mark-to-model” pricing etc? And does anyone/any company really run their lives and businesses to worst case scenarios? I think not. Will there be problems in CRE? – for sure…Will that impact be felt at the community bank level? – again, for sure…Can the regulators balance the need for lending growth with the call for more capital strength? – I’m less sure on this point.

    For my two cents, the real answer is out there and available in the marketplace. The private equity and hedge funds and even the healthy banks are replete with investment capacity – real cash to go. There are literally dozens of displaced bank executives who actually know how to run a good bank hanging on corners like the seasonal migrant workers looking for work. They want to participate in both distressed asset disposition as well as whole bank transactions. Their motives are clear – they want and need equity returns. They believe the bank sector offers much opportunity. Why the regulators persist in stiff-arming this source of capital, both economic and human, and as a result, prefer to drive more and more banks into the deep end of the FDIC resolution pool (where I could make book that the taxpayer is at a significant disadvantage) is something that is worthy of being revisited at policy levels – and, in my opinion, that should be done now, well before another 500 – 2500 banks slip into the quicksand pit!

    Again, it comes down to vision and leadership and politics. It’s a new dawn out there and it calls for some fresh thinking, not tired traditions. Just a thought …

    • LD


      As always, thanks for elevating the debate here. A few questions.

      1. Do you think the regulators are concerned of public backlash if deals structured generate excessive returns for the investors while the public continues to assume large amounts of the risk?

      2. Do we have enough critical woman/manpower within the regulatory bodies to effectively structure deals?

      3. Are we suffering from regulatory fatigue in that the OTS (Office of Thrift Supervision) is rumored to be combined with the OCC (Office of the Comptroller of the Currency)? Is the OTS now ‘mailing it in?’

      Your thoughts and comments are always insightful in helping us navigate. Thanks.

      • coe

        Good questions, LD…my simple answers – Yes, Yes, and Yes!
        o – Yes: the regulators are long enough in the tooth to recall that a number of folks made a boatload of money in FIRREA days (circa late-80s/early 90s), and they will be damned to let that happen again on their watch;
        o – Yes: I think the bank regulators have enough personnel, and I happen to believe strongly that these folks are both talented and committed…the real problem is that the examiners are feeling it is their absolute mandate to intensely demand capital adequacy and lending discipline at a time when the economy needs countercyclical pump priming, and there is neither a personal nor political incentive to “work” with troubled companies…just shove them into the resolution queue, where a completely different set of folks take over with a very tired and ineffective playbook; and
        o – Yes: the thrift regulators (the OTS) are living in limbo, awaiting the ultimate consolidation of their independent authorities into the OCC…it’s only human to wring one’s hands and wonder what will become of you and your career in these circumstances…by the way, what is taking them so darn long to address the details!…even those examiners and managers who are confident of their own footing in a consolidated regulatory reform landscape will definitely play it straight by the book, and try not to bring any attention to themselves that might compromise their own survival…tough times for the many thrifts to work out of C&Ds and MOUs with this uncertainty hovering over the industry and limited to no advocacy/compromise on the regulatory front.

        Keep an eye on the FDIC and their handling of the ballooning assets that are pouring into the resolution trough…and don’t forget to stay in touch with the evolving dynamics at Freddie and Fannie…lastly, I, for one, am less and less confident that our President and his coterie of sycophants and toadies have the foggiest idea of what they should do…unfortunately, I don’t think the right answers have been scrolling up in Barack’s style of leadership by teleprompter…how timely that we are celebrating President’s Day this weekend…something quite ironic in 50 inches of snow in DC – at least with the government on leave this week, there wasn’t much of a chance for the citizenry to be “snowed” even more…

        • LD


          Very interesting color. Much appreciated. Sounds like government remains at work and remains more part of the problem than the solution. Why am I not surprised?

  • divvytrader

    LD : You need to do a seperate column to discuss openly a dangerous new trend underway : the Fed implementing plans to end around the banks !

    1) Yesterday , Fed announced it was setting up direct trading with all the major money market funds as the first step to draining $1 trillion in excess cash when time comes via repo . Federated CIO was in the Bloomberg article expressing delight in bypassing Street repo desks . Why is Fed doing this ? Repo done with Street is ultimate low risk business driven by customers . Its precisely the kind of business Volcker wants banks to focus on . No risk broker business . I cannot see any other reason other than Fed sees more banks failing in future and wants to start creating direct trading today before there are more failures . Can you think of a different reason ?

    2) Look at that direct bid on 30yr yesterday ! 25+% ! How can primary dealers bid in auctions anymore when Fed is allowing huge buyers to bypass primary dealers! It will lead to far worse auctions , far worse volatility , higher rates and more risk of a failed auction . At least here we can wonder if that 25% is actually the Fed bidding itself vs big buyers but at end of day , only other reason would be big buyers afraid ( for credit reasons ) to transact with primary dealers preferring risk free Fed as its dealer .

    Street media has REALLY not picked up on this but i hear alot of head traders at primary dealers are and repo traders are smelling a Fed that is worried about them surviving and setting up routes around them .

    • LD


      Great idea. Will do.

      My gut instinct tells me that counterparty credit risk remains an enormous problem. The general public never fully appreciated this risk, prior to the crisis in ’08. It remains a huge risk even in the TBTF era.

      I will write more on this.

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