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The Worst Case Scenario is not Worst Enough



April 24, 2009 – Comments (6)


The government published the details, but not the actual results, of its bank stress test this afternoon.  I figured that this whole "stress test" would be a bunch of BS...and I was right.  The thing that I find the most disturbing about the test is the following:

the worse case was assumed to be 10 percent, housing prices are assumed to be 10 percent lower at the end of 2010 than the more likely baseline scenario...

The adverse scenario levels are negative 3.3 percent this year and growth of just 0.5 percent next year.

That's the government's WORST case scenario?!?!  That actually seems like a very likely scenario to me and I'm not nearly as bearish as many people out there.  That's like having a person who has had heart surgery (which I have...a bypass) and making them take a slow walk on a treadmill with no incline and declaring that they're fine when nothing happens. 

That's not what doctors do.  They hook you up to all sorts of sensors and make you run as fast as you possibly can up hill until your feet are barely touching the ground, sweat is pouring off of your brow, and you feel like you're going to puke.  Now that's a real stress test.

This "report" that the government is publishing looks more like a leisurely walk in the park given the current state of the economy.  Don't most economists expect unemployment to approach double digits by the end of the year at this point?  Isn't it likely, forget possible that housing prices will fall more than another 10% by the end of 2010 before hitting a bottom?

I understand that the government doesn't want to create panic by using higher numbers for its worst case scenario like 12% unemployment and a 20% further drop in home prices, but come on people are those numbers really that outrageous at this point?  I certainly don't think so, and again I'm not nearly as bearish as many people out there.

The same thing goes for the GDP assumptions.  I find it very unlikely that the U.S. economy will grow by more than 2% in 2010 (that's the government's conservative assumption), but I find its -3.3% in '09 & +0.5% in 2010 worst case GDP forecast to be reasonable.  That is entirely possible, though I would hardly call it the worst case that I can see happening.

Most Banks Have Enough Capital After Stress Tests: US 

On a related note, new home sales fell 30% year over year in March.  Not good.  (see article: New Home Sales Fall 30.6% in March)

By the way, I really, really like the previous blog post that I made and I hated to bump it from the list by writing this one so those of you haven't read it yet should definitely check it out:

The benefit from a competitor's bankruptcy outweighs economic weakness


6 Comments – Post Your Own

#1) On April 24, 2009 at 3:01 PM, bridgeboy0 (28.93) wrote:

Great points!

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#2) On April 24, 2009 at 4:25 PM, rofgile (99.20) wrote:


 I think that in actuality there is a public stress test (10% unemployment, 10% fall in house prices), but there is also a private study that the government is tracking with worse-worst case scenarios.  I'm sure many banks would be borderline then.  Look at how a rough winter and spring has treated the car companies- banks I think are feeling the same level of pressures (just they can use accounting, etc to keep their numbers to whatever is necessary).

 I would be willing to bet that they've run the worst case scenario and that the meetings with the banks include those discussions - just the public isn't going to hear that info.  

 It would just make sense (and I don't think Bernanke is an idiot) to use whatever calculation method they've used and show for each bank what the limits currently are.  I just don't think they want the public to hear that.

 The public stress test results are meant to rally the financials, further attack short sellers, etc. 

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#3) On April 24, 2009 at 4:39 PM, ralphmachio (< 20) wrote:

this stress test didn't include losing reserve currency status, did it?

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#4) On April 24, 2009 at 6:00 PM, Bupp (27.89) wrote:

@ralph, the banks debts are in US dollars and they have significant activities overseas.  If the dollar was devalued it would help them if anything.

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#5) On April 25, 2009 at 11:56 AM, kaskoosek (30.22) wrote:



It looks like Shiff is reading your blogs.

First credit card companies and now this.

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#6) On April 25, 2009 at 5:47 PM, bostoncelitcs (47.18) wrote:

We need another "depression"...If you can't afford your mortgage...move back with the "in-laws" like they used to do back "in the day".  No federal taxpayer dollars to but "toxic assets", let the Chinese buy the McMansions.  Time to play the public golf courses and give up the country club memberships.

We got into this mess by ourselves.  We are going to have to get out of it by ourselves!

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