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European Bank Stress Tests? Nein, Danke!!

Posted by Larry Doyle on June 1, 2010 8:58 AM |

How do you think the wizards in Washington are feeling about the European bailout structured two weeks ago at their behest? In those two weeks, the Euro has plummeted another 5%, equities continue to suffer, and credit spreads continue to widen.

Our Washington wizards are looking back into their bag of tricks and now recommending another of their ‘shell game’ proposals to their European counterparts. Which proposal might this be? How do you spell charade? Try, bank stress tests.

Treasury Secretary Geithner is pressuring European central bankers to perform and release bank stress tests as a precursor to restoring financial health and stability into the European system. The Wall Street Journal highlights Geithner’s recommendation this morning in writing, U.S. to Push Europe on Stress Tests:

The U.S. intends to urge Europe to disclose publicly the results of bank stress tests as a way to calm jitters over the health of the Continent’s financial system, U.S. officials said.

Worries about Greece’s ability to repay its debt, and concerns about the stability of Spain and Portugal, provide a sobering backdrop at the gathering this week in Busan, South Korea, of finance ministers and central bankers from the Group of 20 industrial and developing nations. U.S. officials said they are convinced that by publicly demonstrating the strength of its banks and promising to solidify those that prove weak, Europe might help stem the crisis of confidence.

U.S. officials would maintain that the bank stress tests performed in our nation were a necessary precursor to restoring our financial health. In order to accept that premise, I guess you would have to accept that our bank stress tests were truly vigorous and generated credible results. I do not accept that premise. I was not the only one who believed our bank stress tests were a major sham. FDIC Chair Sheila Bair believed the same and stated as much a year ago. I captured her feelings in my commentary, “Bank Stress Tests: Major Sham?”:

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 specific details are still being worked out, the Treasury and Fed’s tests are expected to determine how banks might perform under the assumption that unemployment ratchets up and overall economic conditions worsen beyond what the market has seen so far.

However, Bair and others argue that the remedial test won’t be able to determine accurately how much each bank will need in the future.

While Geithner, Bernanke, and team would promote our banks as returning to health, the fact is there are still hundreds of billions in embedded losses in our system. These losses are primarily in the home equity and commercial real estate books. The losses are merely being covered by the Fed and Treasury’s front and back door bailouts.

Geithner and Bernanke would clearly like to see the Europeans execute the same bailouts. Which nation has little interest in that approach? Germany. What does Germany think of bank stress tests, and how willing are they to play the same charade? As The WSJ reports:

“You don’t need a stress test to tell you what would happen if Spain became bankrupt; it would be horrible,” one German official said.

And another thing,

Germany has been Europe’s leading opponent of publicly disclosing the results of stress tests. German officials argue the U.S. tests were little more than public-relations stunts, designed so that banks would pass.

Wahrheit, Durchsichtigeit, Redlichkeit!!!

LD

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  • Franz

    Think the Germans care to pick up the tab for a lot of inappropriate lending by a variety of European banks? Don’t think so.

    Think the Germans also care to set the groundwork for inflation, and potentially hyperinflation, down the road/ Don’t think so on that either.

    Is Geithner of German descent? The Germans are probably wondering about him right about now.

    • phil trupp

      “Is Geithner of German descent? The Germans are probably wondering about him right now.” Why does this comment bring back creepy memories of my WWII childhood? Just what are you implying, Franz?

      • fred

        Phil,

        I don’t think Franz was implying anything beyond a potential “common German ancestory”.

        I do think 1)either you have childhood issues that demand professional treatment or 2) your looking for attention by “majoring in minors”.

        In either case, I’d rather not waste my time reading your comments unless you have something of value to add or at least feeling to share that are on topic!

  • fred

    When are US banks going to begin to writeoff non performing mortgages? They took taxpayer money to squeeze the shorts and prop up stock prices presumably to recapitalize and improve captital ratios.

    Let’s let capital ratios begin to reflect true asset valuations (including writeoffs), if not all at once at least over time! And while they’re at it, get the junk now being held by the Fed back on the books of banks were it belongs!






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