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Posts Tagged ‘Mohammed El-Erian’

Will Bank Stress Tests Be “Put on a Curve?”

Posted by Larry Doyle on April 22nd, 2009 9:10 AM |

Will the soon to be released Bank Stress Tests provide real clarity on the health of our banking industry or will the tests be “curved?” Meredith Whitney, highly regarded bank analyst, has indicated that the tests will provide plenty of wiggle room for the banks. Just yesterday Secretary Geithner “goosed” the market by indicating the majority of banks have sufficient capital. To what degree can we trust what Turbo-Tim is telling us?

Mohamed El-Erian, CEO of PIMCO (Pacific Investment Management Company) provides a blueprint for an honest review of the Stress Tests. Mr. El-Erian highlights the following in a Financial Times article:

First, transparency is key. Whether the government likes it or not, hundreds of analysts around the world will reverse engineer the stress tests. The government would be well advised to assist the process through clarity. Obfuscation would result in damaging market noise and further derail the real economy. At the minimum, policymakers need to provide credible details on the methodology, the underlying assumptions and scenario analyses.

To this point, neither the banks nor the government have provided real transparency. What are we to expect when Congress pressures the FASB to relax mark-to-market accounting thus forever clouding real transparency?

Second, the results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks. Out-performing banks should be provided with exit mechanisms from the exceptional government support that they have been receiving and, presumably, no longer need. At the other end, there must be clarity as to how capital-deficient banks that no longer have access to private capital will be handled. (more…)






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