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Posts Tagged ‘Bank Stress Tests’

Lessons Learned Growing up in Boston, MA

Posted by Larry Doyle on December 1st, 2010 10:21 AM |

Boston SkylineI loved growing up in Boston. My beloved knows how often I think back to the lessons learned and ‘education’ received in those formative years of the 1960s and early ’70s.

While growing up as a youth in Boston, my friends and I experienced plenty of situations that shaped our characters and our outlook. I know for a fact that my youthful experiences also had a profound impact on shaping my instincts.

What did I learn growing up in Boston? What did I learn riding those city buses and trolley cars? What were the lessons learned at Hynes, Fallon, and Billings Fields? What will I never forget when my friends and I ‘hustled’ our way into sports venues (gaining entry to the Boston “Gaahden” via the fire exits, sneaking into Boston College football games amidst the college band)? (more…)

Will European Bank Stress Tests Be “Garbage In, Garbage Out?”

Posted by Larry Doyle on July 23rd, 2010 6:52 AM |

All eyes will turn toward Europe this afternoon for the much anticipated release of the Euro-style Bank Stress Tests. Those who truly embrace real ‘sense on cents’ know that the process and the data are far more important than the actual results. Why is that? If these tests are charades or nothing more than ‘garbage in,’ then the results will most assuredly be ‘garbage out.’

On this note, let’s review a few comments from a Bloomberg preview of these tests. Bloomberg reports, Success for Stress Tests Hinges on Data, Not Failures:

1. The success of the European Union’s bank stress tests hinges on how much detail regulators provide about the basis for their conclusions, not on the number of lenders that fail, investors said. (more…)

Sense on Cents Enters The Debate Room

Posted by Larry Doyle on June 17th, 2010 2:24 PM |

Should European banks conduct bank stress tests. Should individual bank’s test results be publicized? Should the results in totality be publicized? Can the tests themselves be fairly administered and generate robust results?

Bloomberg Businessweek recently asked for my thoughts on this topic for purposes of generating a debate. The Debate Room was just published:

by Bill Bartmann, Bartmann Enterprises

It makes good sense for Europe to conduct a series of stress tests on its banks so that countries and companies have some better sense of their risk exposure.

Financial institutions use stress tests to determine the degree to which a bank or financial institution can withstand a shock of a given magnitude. For example, instead of doing a projection on a best-estimate basis, the bank does a scenario analysis looking at negative variables: What happens if interest rates rise to X percent? What happens if loan defaults rise to X percent? What happens if gasoline prices rise to $X?

But stress testing has relevance for other entities as well. One can apply stress tests to an entire nation. For example, what is the impact on the U.K. if the euro falls 25 percent? Or what happens to Germany if Greece defaults on its national debt? Stress testing also works with nonbank companies—say, a manufacturer or a retailer: What happens to Nestlé (NESN:VX) if the dollar rises and exports to the U.S. become more expensive?

The G-20 Financial Stability Board is urging European nations to publish the stress-testing results of its banks, and cites the openness of stress testing in the U.S. as a factor beneficial to restoring market confidence. Conservative or progressive, we can all agree that more stability in markets is a very good thing.

by Larry Doyle, Sense on Cents

Given the success of the bank stress tests run here in the U.S., should the same tests be administered in Europe as a precursor to economic recovery? Only if you believe in shell games, manipulating vigorous accounting principles, and the concept of “too big to fail.” Aside from that, I believe our bank stress tests were largely a charade, and the same would likely transpire in Europe.

For any financial test to be deemed credible, the test itself needs to be truly robust. Those in America may claim our bank stress tests were truly successful, but I firmly believe the tests should be graded incomplete at best.

Why do I make this claim? Let’s enter the world of HELOCs (home equity lines of credit). The base-case assumption used in our bank stress tests was for cumulative losses on this product of 6 percent to 8 percent with a worst-case scenario of 8 percent to 11 percent. Those assumptions were ridiculously low. Our banking system continues to be chock-full of likely hundreds of billions in losses on this product. Those losses were largely overlooked in our tests.

Would European bank stress tests fully expose the nature and value of a variety of loans held on their books or merely disguise them in the same manner as the U.S. tests? If European governments want to play that game, then they should go right ahead and run the same tests and play the same charade, but do not expect real transparency and integrity along with them.

What do you think? How do you score it? Please leave your thoughts and comments at the Bloomberg Businessweek site, as well. Thanks!!


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European Bank Stress Tests? Nein, Danke!!

Posted by Larry Doyle on June 1st, 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. (more…)

Elizabeth Warren Calls for New Bank Stress Tests

Posted by Larry Doyle on February 11th, 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: (more…)

Sense on Cents 2009 Halls of Fame and Shame

Posted by Larry Doyle on January 4th, 2010 9:47 AM |

For those who missed last evening’s No Quarter Radio’s Sense on Cents with Larry Doyle Hall of Fame and Shame Induction, I am compelled to provide a recap and listing of all those honored or dishonored — depending on one’s perspective. What was the measuring stick to make these assessments? Very simply, the pursuit and promotion of truth, transparency and integrity as we navigate the economic landscape.

Some names you will immediately recognize, others you may not. Additional information about these individuals can be found via the search window (located above the right sidebar) at Sense on Cents. The names appear in no specific order of priority or importance. With no further adieu . . .

Sense on Cents 2009 Hall of Shame Inductees

1. Bernie Madoff
2. Nicholas Cosmo: ran financial scam at Agape World
3. Tim Geithner: tax cheat amongst other things
4. Larry Summers: arrogant, condescending, and sleep deprived
5. Auction-Rate Securities dealers and managers, especially Oppenheimer Holdings, E-Trade, Schwab, Pimco, Van-Kampen, Blackrock
6. The Wall Street Journal
7. George Soros
8. Chris Dodd (D-CT): reasons too numerous to mention
9. The Board of FINRA
10. Franklin Raines and Leland Brendsel: former CEOs of Fannie and Freddie
11. Wall Street management, especially Lloyd Blankfein of Goldman Sachs
12. Frank Dipascali: a special place in hell for Madoff’s CFO
13. Rahm Emanuel
14. Jimmy Cayne: CEO of Bear Stearns
15. Dick Fuld: CEO of Lehman Bros.
16. Congress collectively
17. Barney Frank (D-MA): reasons too numerous to mention, but start with “I want to roll the dice…”
18. Bank Stress Tests: a total sham
19. Allen Stanford
20. Steven Rattner: car czar
21. Bruce Malkenhorst: receiving a 500k pension from Vernon, CA
22. Barack Obama: just another politician (more…)

Sheila Bair and the PPIPs Tour: Cancelled

Posted by Larry Doyle on June 4th, 2009 7:56 AM |

What is going on with the PPIPs?

The Public Private Investment Program was “scheduled” to play a grand national tour in helping the banking industry cleanse itself of toxic assets. Did the “lead singer,” Sheila Bair, lose her voice? Did the “backup” in the form of the banks and investors lose their rhythm? Let’s “boogie” on over and check it out.

The FT reports, FDIC Stalls Sale of Toxic Loans:  

Details of the Treasury’s toxic asset plan are in doubt after the Federal Deposit Insurance Corporation on Wednesday said it was suspending a test run of the legacy loans programme.

Sheila Bair, chairman of the FDIC, said development of the programme – designed to encourage investors to buy toxic, or legacy, loans from banks in order to restart the flow of credit – would continue but a pilot sale of assets was on hold.

“Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system,” Ms Bair said in a statement.

Is this all that it appears to be or is there more of a smokescreen on the stage inhibiting all parties – Uncle Sam, the banks, and investors – from “giving it their all”? Let’s dive into the mosh pit.

Sense on Cents views the situation as follows:

1. Impetus for banks to liquidate toxic assets (now called legacy assets by the Obama administration) is dramatically lessened. Why? Are they now less toxic? No, anything but that. With the relaxation of the mark-to-market accounting standard, banks can now “mark to model.” As such, banks are not forced to write the asset value down. In so doing, banks are now not compelled to sell it at a price which would incentivize an investor to purchase.      

2. What about all of the equity capital raised by banks over the last few weeks after results of the Bank Stress Tests? Has that had an influence on banks need to raise capital via the PPIP?

Yes, but remember that the Bank Stress Tests only covered the largest 19 banks in our nation. These banks have been largely successful in raising new capital. That said, the toxic legacy assets remain on their books. Do not forget, though, that many small to medium sized banks and thrifts have a sizable amount of underperforming loans (residential mortgages, commercial real estate, corporate loans) on their books. These banking institutions were neither put through a “stress test” nor are they in a position to raise capital as easily as the large banks.

A successful PPIP program would have helped these institutions.

3. Hints of potential self-dealing by banks involved in the PPIP, both as seller of assets and buyer of assets, would have created a firestorm. I addressed this problem in writing, Putting “The Fix” in the PPIP.      

4. With all due respect to the lead singer, Sheila Bair, all indications are that her handler – an individual named “Uncle Sam” – can not be trusted. Potential investors have been very reluctant to get overly involved with Sam. Why? In other performances, Sam has “strip searched” individuals upon entry and also played various iterations of “bait and switch.”

As the FT reports:

Banks and investors, meanwhile, had misgivings over taking part in the PPIP amid fears the politically charged climate could prompt Congress to change rules on issues such as executive compensation for those firms that participated in the programme.

While this tour is being cancelled, don’t get overly despondent. I am sure our Summer concert series will be able to provide plenty of entertainment going forward!!


“Crony Capitalism”

Posted by Larry Doyle on May 29th, 2009 7:55 AM |

Has the economic integrity of the United States of America been reduced to the level of a banana republic? This theme is recurring through many channels. In the midst of a daily perspective, one may quickly and strongly dismiss such claims as overhyped libertarian fearmongering.  I do not put myslef in that camp, but I do take pause to reflect on the long term implications of actions and programs enacted throughout our economic crisis. 

Sin-Ming Shaw, a Thought Leader (left sidebar) here at Sense on Cents, provides sobering and thoughtful commentary on this topic in his article, “America’s Crony Capitalism.” While we all would like a swift, strong, and fast economic recovery, Shaw addresses the lack of integrity and transparency in the process. Many would maintain that “we did what we had to do” or similarly “these ends justifies these means.” I strongly believe the costs have not yet been paid, continue to accrue everyday, and will be astronomical over the long haul.

Shaw provides insights on the Bank Stress Tests:

The government had allowed bankers to “negotiate” the results, like a student taking a final examination and then negotiating her grade.

The truth is that the tests were not designed to find answers. Both Wall Street’s chieftains and the Obama administration already knew the truth. They knew that if the true conditions at many big banks were publicly revealed, many would have been immediately declared bankrupt, necessitating government receivership to stop a tsunami of bank runs.

Wall Street’s titans, however, had convinced Obama and his team that their continued stewardship was essential to getting the world out of its crisis. They successfully portrayed themselves as victims of a firestorm, rather than as accessories to arson.

Strong and indicting charges put forth by Shaw. The fact is, though, he is accurate in his analysis. Washington and Wall Street have sufficiently agreed in their assessment and analysis of this crisis. They have conspired on their entrance to solution. They will debate their exit knowing full well they are joined at the hip in the process.

The necessary rigor to expose and unearth the crime and criminals is severely lacking.  Despite talk of a Financial Inquiry Commission, word from Washington is that stall tactics, turf wars, and partisan politics will once again rule the day in forestalling the needed indictments and prosecutions, both literally and figuratively, of those involved in this mess.

Our “Washington wizards” may declare short term victory (Austan Goolsbee interview yesterday), and point to recovering markets as evidence. Those who may care to look at the world from a larger and longer perspective, fully appreciate that history will judge this time using a different measure. Shaw asserts:

The world also wanted to see the US retaking the high road in reinforcing business ethics and integrity – so lacking under the last administration. As taxpayers had already put huge sums into rescuing failing banks, with the prospect of more to come, a transparent process to reveal how the money was being used was imperative. 

All this said, our future for now is both clear and murky. The Obama administration, as well as the Bush administration, sacrificed integrity in the name of short term bank solvency. The efficacy of this move will be debated for years. The fact is, though, the cost of such a move is not fully appreciated. Shaw summarizes as much:

Like swine flu, crony capitalism has migrated from corrupt Third World countries to America, once the citadel of sound public and private governance. Is it any wonder that China is perceived as an increasingly credible model for much of the developing world, while the US is now viewed as a symbol of hypocrisy and double standards? 


Bank Stress Tests: Vigorous or Sham? Let’s Review HELOC Losses

Posted by Larry Doyle on May 20th, 2009 9:26 AM |

If you want to know just how inaccurate government loss assumptions were in the recently released Bank Stress Tests, let’s enter the world of HELOCs (Home Equity Lines of Credit).

Before we address loss statistics on HELOCs, let’s go to the Federal Reserve for a clearcut definition of the product. What is a Home Equity Line of Credit?

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses.

With a home equity line, you will be approved for a specific amount of credit. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage.

This mortgage product, often a second mortgage, developed as an enormously popular vehicle for homeowners to tap the equity in their home, especially during the period of significant home price appreciation earlier this decade. Make no mistake, though, it is just another form of leverage. (more…)

We Still Have To Pay The Bill

Posted by Larry Doyle on May 5th, 2009 4:16 PM |

Equity markets have rallied back to unchanged on the year. Libor is back to 1%. Housing is showing signs of life. Other economic indicators are declining at a less rapid rate. Fed chair Bernanke provides a cautiously optimistic tone in his testimony today. So why am I as concerned as ever?

Perhaps I do not fully appreciate the benefits of the massive government injections of capital into our economy. Why? I view any short term benefit from the capital injections as merely covering for losses which are still embedded in the system. The bills associated with those losses, in terms of increased interest costs and principal writedowns, are yet to be paid. 

Where are the losses? Well, the results of the Bank Stress Tests have been leaked and 10 of 19 banks will supposedly need more capital. The commercial real estate market is totally dependent on the government committing to 5 yr loans via the TALF.  I view the rebound in the residential real estate market as mortgage mayhem, not mortgage magic.  None other than the IMF continues to highlight that our economy has another $1 trillion plus in losses.     

I will grant Obama and Bush and their respective administrations credit for succeeding to this point in what they were trying to accomplish. However, that success, in my opinion, only means that longer term costs will be steeper and longer term benefits will be further off as a result.

Nouriel Roubini and Matthew Richardson address these points in today’s WSJ, We Can’t Subsidize The Banks Forever.   

From my perch, I view Obama and team as indiscriminately allocating capital across too many programs. I am becoming somewhat concerned that Bernanke is wondering if they have put too many chips on the table.

Roubini and Richardson offer:

. . . stress tests aside, it is highly likely that some of these large banks will be insolvent, given the various estimates of aggregate losses. The government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money. This means it will have the unenviable tasks of managing the systemic risk resulting from the failure of these institutions and then managing it in receivership. But it will also mean transferring risk from taxpayers to creditors. This is fair: Metaphorically speaking, these are the guys who served alcohol to the banks just before they took off down the highway. 

While the tone feels better, there is no doubt we still have challenges. Private enterprise’s  interaction with Uncle Sam is one of the biggest challenges.

All this said, the government had a choice between immediate losses with excruciating pain or buying time with long term underperformance. They chose the latter.

We still have to pay the bill.


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