Stress Tests’ “Cover” Only Indicates Bad News
The media and the Administration are already out there spinning the results of the stress tests. I wouldn’t be surprised if they say that all banks “passed.” But the real suckers would be those who invest in this “bump” in the market before another drop this summer. The banks are still not viable and many are being propped up by distortions in their books and “funny money.” If the results were great in the first place, the government would not have delayed the release of the reports. I wonder if the politicians on Capitol Hill really think we are that dumb!? Roubini, a noted economist and known as Dr. Doom, has been correct on most of his statements about the markets and about banks – he says the following:
The spin machine about the banks’ stress test is already in full motion. Some banking regulators have already served up–to The New York Times–their spin that all 19 banks that are subject to the stress test will pass it. In other words, not one will fail.
But let’s look at the actual data. The macro data for the first quarter on the three variables used in the stress tests–growth rate, unemployment rate and home-price depreciation–are already worse than those in the U.S. government baseline scenario for 2009. They are, in fact, even worse than those for the stressed scenario for 2009.
The government used assumptions for the macro variables in 2009 and 2010 that are so optimistic that the actual data for 2009 are already worse than the adverse scenario. As for some crucial variables, such as the unemployment rate–key to proper estimates of default and recovery rates for residential mortgages, commercial mortgages, credit cards, auto loans, student loans and other banks loans–the current trend shows that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009. Put plainly, the results of the stress test–even before they are published–are not worth the paper on which they are written.
Let us look at how the stress tests are done. According to the U.S. government, there are two scenarios: a more optimistic “baseline scenario” for 2009 and 2010 for the three macro variables (gross domestic product, unemployment and home prices); and a more pessimistic “alternative adverse scenario.”
The baseline scenario assumes–based on the average of the forecasts by the consensus of macro forecasters at the time when the stress tests were announced–that GDP growth will be -2.1% in 2009 and 2% in 2010; that the unemployment rate will average 8.4% in 2009 and 8.8% in 2010; and that home prices will fall 14% in 2009 and 4% in 2010. In the alternative adverse scenario, GDP growth is assumed to be -3.3% in 2009 and 0.5% in 2010; the unemployment rate is assumed to average 8.9% in 2009 and 10.3% in 2010; and home prices are assumed to fall 20% in 2009 and 7% in 2010.
The description provided by the government of the stress test also shows graphs–but not actual figures–for the quarterly behavior of the three macro variables in 2009 and 2010 for both scenarios. Based on these quarterly graphs, in the first quarter of 2009 the unemployment rate would approximately average 7.7% in the baseline scenario and 7.8% in the adverse scenario; the GDP growth rate would be -1.9% in the baseline scenario and -2.1 in the adverse scenario; and home prices would fall 4% in the baseline scenario and by 7% in the adverse scenario.
How do these scenarios actually stack against actual figures for the first quarter of 2009, with current consensus forecasts and with current likely paths for these macro variables?
Read the rest of the bad news at Forbes…
