Brad DeLong is properly skeptical

About the bank stress tests, 'results' of which have been endlessly leaked and/or trial balooned for a good week now:

Ummm... This Should Not Be Happening
Francesco Guerrera and Sarah O’Connor in the FT:

Bank objections delay stress tests: US regulators will delay the release of stress test results for the country’s 19 biggest banks until next Thursday, after some lenders, including Citigroup and Bank of America, objected to government demands that they needed to raise billions in fresh capital. Citi, one of the biggest victims of the crisis that has already been bailed out three times by the government, is believed to have been told by regulators that it needs more than $5bn in fresh capital, while BofA might need to convert $45bn in government preferred shares into common equity...

The banks should not be negotiating with the government over this.
There comes a point when the right thing to do will be to set up a Maggie Sue--a manufacturing, transportation, services, and other business loan-guarantee authority owned by the government, a financial GSE alongside Fannie, Freddie, and Ginnie--to guarantee "conforming" loans to operating companies, and let the major banks wither.

Remember: the purpose of a financial system is to make new loans so that operating firms can obtain financing on reasonable terms. We don't care what happens to the value of old loans or to current-bank stakeholders as long as companies going forward can get new loans.

Shades of last year, yet again.....

Andrew Ross Sorkin, in today's Times: Stress Tests? No Big Deal After All

....here’s the rub: If some banks can’t pass this test — which William Black, a former senior bank regulator during the S.& L. crisis, has called “a complete sham” and others have suggested is a whitewash — perhaps we have a larger problem.

Maybe this test is going to show more failures than we thought.

Any banks that actually might “fail” the test, and I put those words in quote marks for a reason, will be given six months to raise new capital on their own or accept capital from the government.

But what private investor is going to invest in any of the failing banks, knowing full well that the government may end up coming in later on and diluting the investor’s stake?

This may end feeling a little bit like a replay of the government’s intervention in Fannie Mae and Freddie Mac. You’ll recall that Henry M. Paulson Jr., the former Treasury secretary, received temporary powers from Congress to take over Fannie and Freddie. At the time, he said he didn’t plan to use those powers, just the threat of them.

Really - this is getting eerie.....

Why oh why can't Team Obama simply get it over with? Yes, it'll be costly both politically and financially, but we keep fiddling while Rome burns, and zombie banks get increasingly desperate to appear alive (remember all those Q1 earnings fantasies?...)

On second thought, this is increasingly also looking like Japan in the 1990's.

Not fair to the smaller banks?

It's increasingly looking like the stress tests will harm Regions Financial and maybe another one or two regional banks (Fifth Third gets mentioned a lot) while letting Citi and BoA (most notably) off the hook:

See this: Stress Tests May Force Banks to Convert TARP Stock

April 27 (Bloomberg) -- U.S. banks that received results of their federal stress tests last week were given three options if they need additional capital to withstand the recession. The reality is they may only have one.
Getting federal aid or selling shares -- two of the choices offered to the 19 lenders being tested -- aren’t practical politically or financially, according to analysts, including Jeff Davis, the research director at Howe Barnes Hoefer & Arnett Inc. in Chicago. Lawmakers have opposed adding more to the $700 billion that the government already committed and investors have balked at buying shares of financial firms after a two-year drop.
That leaves the third option presented by Treasury Secretary Timothy Geithner: changing the preferred stock held by the U.S. Troubled Asset Relief Program into common shares. Doing so would prop up capital under accounting rules and dilute the value of shareholdings for current investors.
SunTrust Banks Inc., KeyCorp and Regions Financial Corp., pegged by Morgan Stanley last week as the “most likely” to need capital, dropped more than 70 percent in New York Stock Exchange composite trading during the past year. Shares of the three companies were indicated lower in Germany today.
“The best most can hope for is to stay as they are and not be forced to draw down still more TARP capital or convert what they’ve got into common stock,” said Karen Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.

If indeed the regional guys take it on the chin while the big boys don't, it will make this article particularly troubling: Geithner, as Member and Overseer, Forged Ties to Finance Club

No change in the patient

Good question from Macroman

This is perhaps a naive question, but it's one that your author has not seen clearly elucidated elsewhere. What, exactly, is the purpose of the stress tests? It seems fairly obvious that they are not intended as a sober measure of how the banking system would fare under conditions of extreme economic stress. If they were, then the scenarios would offer a bit more choice than "Optimistic and Optimistic (Roubini version.)"
So what, then? Political cover to enable payback of the TARP and/or further injection of funds? To make everyone feel wonderful that the banking system is actually in pretty good shape? (Macro Man would normally scoff at this, but after the market action of the last few weeks, he's not so sure.) In a post-FASB, "say whatever you want" world, what possible purpose does this charade have? Macro Man is curious to hear your thoughts.

My thought is that the stress test are political cover - make it look like the Feds are doing something while they desperately try to buy time for the recovery spending to kick in. Problem is that the recovery $$$ is too little and too back-ended, the banking crisis too severe, and the stress tests not stressful (nor transparent) enough.

Anyone wonder how CNBC got leaked word that only one of the 19 banks will 'fail'? (Stress Test Shows One Weak Link Bank )

Stress tests

This from a warning issued by The National Institutes of Health a few years ago:

"The number of Web sites offering health-related resources grows every day. Many sites provide valuable information, while others may have information that is unreliable or misleading."

Indeed.

See this from Bloomberg: Some analysts were more than a tad dismissive:

Some gems:

The report was “completely worthless,” said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia

My problem with this is sort of like Garrison Keillor and Lake Woebegon, where all children are above average,” said Nancy Bush, an independent bank analyst at NAB Research LLC

"A lot of triple talk,” said Jim Glickenhaus, who helps manage more than $1 billion, including shares of Bank of America Corp., at Glickenhaus & Co.

“The assumptions the regulators have used here seem to imply that they’re anticipating a bottoming out of the economic downturn,” said Jeff Davis, director of research at Howe Barnes Hoefer & Arnett in Chicago.

“The question I have, by using fourth-quarter numbers, is this skewed positively?” said Lawrence Kaplan, an attorney with Paul Hastings

“The anticipation over the white paper appears to be much ado about nothing,” said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York.

Bank stress tests - guesstimates

Interesting article in today's Times by Eric Dash, in which the 19 banks in question are ranked in some order of health: Edgy Banks Start to Get Word Today on Stress Tests

Citing estimates by Frederick Cannon of Keefe, Bruyett & Woods, it seems "banks might need as much as an additional trillion dollars in capital"

Dash's list of banks is as follows:

Poised to withstand potential worsening of the recession:

• Blackrock
• Goldman Sachs
• Morgan Stanley

Custodial banks with the worst behind them (taken their losses):

• State Street
• Bank of New York Mellon

Ditto, 'well-run commercial banks':

• JPMorganChase
• US Bancorp

'At the other end of the spectrum', need additional capital:

• Citibank (duh)
• Bank of America (duh)

Regional banks 'bracing for huge losses' (esp commercial loans):

• Fifth Third
• Sun Trust Banks
• Regions Financial

'Uncertain category' depending upon what regulators decide:

• American Express
• Capital One
• BB&T Bank
• PNC Financial
• Wells Fargo

More on bank profits - "out of thin air"

Andrew Ross Sorkin chimes in:

Bank Profits Appear Out of Thin Air
By ANDREW ROSS SORKIN
Banks are trying to wow their audiences with better-than-expected numbers, but investors aren’t buying it for a second.

Some special gems, emphases mine:

Steven Roth, professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?

“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”

It's almost impossible to believe, but this banking situation is becoming more and more of a farce with each passing day....