Yeah, we passed the stress test. Why do you ask?
The real stress test is a test called reality.
Federal regulators will start meeting with bank executives today to brief them on the results of the Treasury Department’s so-called stress tests.
There’s been a sense all along that the stress tests weren’t necessarily what they were being billed as. That feeling’s been growing ever since reports surfaced that the tests, rather than separating the strong banks from the weak, would instead find that essentially all of the banks are “strong,” albeit some stronger than others.
“The much ballyhooed stress tests to be given to systemically important banks are mostly window dressing,” former Dallas Fed president Bob McTeer wrote in February, ”but could still have serious consequences by giving the regulators an occasion to do whatever they want to do.”
Today, if any detail actually emerges, we can expect to see the methodology behind the test. But what should be becoming clear is that facts on the ground, as the boys at the Pentagon like to say, are overtaking the test’s purported methodology.
The test comprised several criteria under which the banks test themselves. For instance, it presented a “more adverse” scenario under which unemployment averaged 8.9% this year.
Well, the unemployment rate sits at 8.5%, after three months. Want to guess what it’s going to average this year?
The “more adverse” scenario also assumed housing prices would fall, on average, 22% this year, according to the Case-Shiller index. The last Case-Shiller index had them down 19%.
So the fact is that reality is turning out to be a far more rigirous stress thest than the stress test itself. And that’s leading to an acknowledgement that the government may well need to get more involved, according to the Journal:
The U.S. government may end up acquiring a significant ownership stake in banks as it works to stabilize the financial system, according to a draft report from top regulators - the starkest acknowledgment yet of the extent to which the government could become intertwined with the financial system.
In any case, the results are only the first act, Ryan Avent writes at Portfolio’s Market Movers blog:
“The main event is what the government rolls out as its solution,” he says. “I have this uncomfortable feeling that if the stress tests reveal anything like the true picture at a Citigroup and the policy response is a combination of an increase in equity stake, fingers crossed for private recapitalization, and the promise of PPIP, markets may be very upset indeed.”
(Steven Russolillo contributed to this report.)
