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Home“The Giant Elephant in The Room”
Posted by Larry Doyle on September 21st, 2010 12:02 PM |
What is holding back our economy? Why isn’t there more credit available in our banking system?
I have answered these questions numerous times over the last two years BUT many in Washington pretend not to know the answer and pander to their constituencies in the process. Regular readers of Sense on Cents are well aware that the books of our banks–especially our largest money center banks–remain chock-filled with loans that are being valued far in excess of what they are truly worth. Let’s navigate.
I first addressed issues within the second mortgage and HELOC (home equity line of credit) space in Fall of 2008 (Sense on Cents/Second Mortgages). Here we are a full two years later and America still has not received a straight answer and a full accounting by the banks or their regulators as to this “sinkhole” on their books and in our economy.
Let’s dive into this hole, get a little dirty, and again expose the issues within this sector. (more…)
Kenneth Rogoff: “A Lot of Insolvent European Banks”
Posted by Larry Doyle on July 7th, 2010 5:30 AM |
Kenneth Rogoff
Should the European Union run bank stress tests or not? While that question has been hotly debated over the last few months, we received an answer today from one of the most highly respected economists in the world. Who might that be? Harvard’s Kenneth Rogoff, a Thought Leader and Sense on Cents Economic All-Star.
I have often referenced Rogoff’s work over the last eighteen months (go here) and hold him in the highest possible regard. So, about those European banks and the hotly debated stress tests? What does Rogoff think? Are you sitting down?
In a Bloomberg commentary, European Banks’ Hidden Losses Threaten EU Stress Test, we learn: (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:
PRO: A SURVIVAL MECHANISM
by Bill Bartmann, Bartmann EnterprisesIt 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.
CON: FAULTY MECHANICS
by Larry Doyle, Sense on CentsGiven 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!!
LD
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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…)
