Read the Full Article here at Naked Capitalism The Fed Stress Tests While Europe Starts to Burn
From Naked Capitalism
Our headline at odds with the media reports on the newest confidence-bolstering ploy by the Federal Reserve, that of new, improved stress tests for the six banks at the apex of the US financial services industry looting operation: Bank of America, Citi, Goldman, J.P. Morgan, Morgan Stanley and Wells.
There’s a noteworthy gap between the scenarios employed in the 1.0 version, which took place in early 2009, when the banks were told to get more capital or else, and the ones about to be implemented. The current stress scenario is a Eurozone crisis, with unemployment to reach 13% in the US (versus a 2009 stress test peak in the “adverse scenario” of just over 10%), a European GDP contraction of 6.9%, and (supposedly) “market price movements seen during the second half of 2008.”
Per the Financial Times, the benchmark will be whether core “tier one common” equity stays higher than 5 per cent in the face of these projected conditions. Banks that fall short (and everyone sees Bank of America as the likely problem child) may be forced to raise equity. Firms that plan to issue dividends in excess of 30% of net income can expect further scrutiny by the central bank. The Wall Street Journal reports that the subjects are grousing about how badly they are being treated, including that staffers will have to work over the holidays (banks are to submit information by January 9, with the results due in March). Not surprisingly, per the Journal, this is yet another confidence ploy:
The switch to public disclosure [a change from a 2010 version of the exams] is the Fed’s way of demonstrating that the U.S. banking system can withstand any turmoil, said analyst Gerard Cassidy of RBC Capital Markets. The hope is “investors will say, ‘Wow the U.S. banking systems can handle these shocks very well,’” Mr. Cassidy said.
This all sounds well and good, right? We’ll get to the adequacy of these tests in due course, but the reporting conveniently ignores the fact that the Fed has gotten religion appallingly late in the game.
Wednesday, November 23, 2011
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