The Stress Test Smoke Screen

| May 7, 2009

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At 5:00 PM Eastern today, the treasury will finally release their “Stress Test” results. Not to belabor this, but you should largely ignore them.

From the Wall Street Journal:

Results of the government’s stress tests of the nation’s largest 19 banks started to trickle out Wednesday, highlighting the burgeoning gaps between the industry’s strong and weak players.

Among the institutions that have been instructed by the Federal Reserve to raise more capital are Wells Fargo & Co., Morgan Stanley, GMAC, State Street Corp., Bank of America Corp., Citigroup Inc. and Regions Financial Corp., according to people familiar with the matter. The banks with the biggest capital deficiencies are Bank of America, with a $34 billion hole; Wells Fargo, which needs to raise $15 billion; and GMAC, which faces a $11.5 billion shortfall, the people said.

Firstly, the criteria are completely made up. The future conditions they test the banks against are not slated to happen until next year (2010), however some of the bad conditions they were testing against have are already in effect as of today.

Next, the entire premise is foolish. This entire stress test process was created to distract the public from the un-sound fundamentals of the banking system. At the same time it provides an elaborate and deliberate enough display that most people will accept it as reality and stop worrying about the banks.

Lastly, it’s really interesting to see who they have labeled as the bank needing to raise the most cash; none other than Wells Fargo. Some of you may recall that Wells Fargo fought hard against TARP and did not want to participate. Given the current climate in Washington, one should not be surprised that there is a heavy portion of “payback” for anyone who does not want to be part of the herd.

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About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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