angusthermopylae (35.79)

Demand Another Stress Test!

November 05, 2009 – Comments (5) | RELATED TICKERS: STR , ESS , ED

Before everyone starts pulling out the pitchforks and firing up the torches, let's see how this might play out.

Harken back to the days of yore, when the Collapse was fresh, the bailout outrage was strong, and the Captains of the Financial Industry were hunted in the streets by packs of angry politicians.  The Average Joe, ears still ringing from the cries of "Yes, We Can!" and head still spinning over executive bonuses, raised a furious cry to their Leaders in DC.

"Save us," they said.  "How bad will it get?  Is my bank safe?  Who is the last Cylon?"

And the Senators and Representatives and the Lobbyists looked up from their conferences and committee meetings and said, "Huh?"  But it wasn't long before they, too, joined the fray.

And thus the Stress Test was born.

Errr...huh?

The stress tests were proposed in order to answer a couple of points (or, for the more cynical amongst us, to appear to answer a couple of points).  First of all, one of the most common question was "If the banking system is so weak, how many banks will go under or need more bailouts?"  Since the populist outcry was torn between "Help me!" and "Don't help them!", the decision was made to bolster the confidence in the banking system by "testing" the ability of the banks to withstand a drawn out economic downturn.

And it worked--pretty much every bank passed.  (Isn't that just peachy?)  Sure, a few had to raise some money, no one "failed."

Among the criteria was unemployment at 8.9% this year (2009), 10.3% next year, economic contraction of about 3.3% overall, and housing falling by 22%.

Various articles describe these variously as "averages," "hitting," and "overall."  I don't know enough about the inner workings of the tests themselves (if someone does, please enlighten me), but it looks like the "kitchen table" issue of numbers

Tomorrow, we get the job numbers for October.  Today's numbers were only about 512,000...best since January of this year.  But the overall unemployment is hitting about 9.8-9.9%...and much worse in some areas.

So, by one interpretation, we have blown the original testing criteria out of the water...and 10% isn't even being argued as unlikely.  To me, that means that it could be much worse.  (Yes, it could be better, but who knows?)

The Criticism

Much ado was made about the nothing of the stress tests, especially here on the Fool.  Blogs were posted, comments made, blood feuds sworn...I think I even saw the Hatfields and McCoys cleaning up their muzzle loaders (guess how far I live from Kentucky?)

After the results were announced, everyone pretty much grumbled and decided that it was all pointless....

...which is my point!

The Deciders who came up with the Stress Test concept pushed it as a good way to check the health of the economy.  They also are still making the Big Decisions about banking laws, budgets, executive pay, and (now) are part owners of two auto manufacturers...or at the very least made all of us part owners.

But I've yet to see anyone go back and question their pronouncement that our banking system is healthy was worth the paper it was written on.  It looks like they missed the boat on how bad unemployment would get; what else did they miss?

The Call to Action

I suggest this:  Demand another Stress Test of all the big banks.  "Too big to fail" hasn't gone away.  over 100 banks have gone under this year.  And unemployment is worse than predicted.  It's possible that our Big Finance will not be able to survive.

There are only two logical responses to this request, as far as I can see:

--"We don't need one."  In which case, we ask, "Why did we need the first one?  Was your criteria wrong?  Is there a turnaround coming up that you haven't told us about?  How do you know the banking system is healthy---weren't you stung before?"

--"You're right; we need another stress test."  Then the questions are "How come you haven't set up another test before now?  What criteria are you going to use?  Really, how confident are you in the banking system?"

With commercial real estate getting shaky, Fannie Mae asking for $15 billion more in help, more banks going under, and unemployment higher than expected (yeah, we'll find out more tomorrow), I think it's a fair request.

Stress Tests were supposed to show us how the banks are doing--isn't that question still up in the air?