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Wednesday, April 22, 2009 9:17 PM

Leaking and Reeking of Stress

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The results of the Geithner's stress test cake walk are going to be announced debated by the general public the stress test participants on Friday.

Please consider Stress-Test Briefings for Lenders to Begin Friday.

Regulators will begin briefing banks Friday about how they fared in government-performed "stress tests," giving lenders an opportunity to debate the findings before they're made public a week later, according to government officials.

The discussions will signal to some banks whether they'll need to seek additional capital, either from private investors or the Treasury Department.

On Tuesday, Treasury Secretary Timothy Geithner said "the vast majority" of banks could be considered well-capitalized. But he also said the impact of the government's efforts to ease the financial crisis so far had been "mixed."

In the stress tests, regulators used some estimates of likely losses on loans that were tougher than observers had expected.

Under a more adverse scenario, which assumes a 10.3% unemployment rate at the end of 2010, banks would have to calculate two-year losses of up to 8.5% on their first-lien mortgage portfolios, 11% on home-equity lines of credit, 8% on commercial and industrial loans, 12% on commercial real-estate loans and 20% on credit-card portfolios, according to a confidential document the Federal Reserve gave banks in February that was viewed by The Wall Street Journal. Regulators are expected to have used other assumptions as well when measuring a bank's strength.
Cake-Walk Scenarios

Note that the adverse scenario assumes a 10.3% unemployment rate at the end of 2010. Hells bells, it's highly likely unemployment far exceeds 10.3% before the end of 2009.

Let's take a look at a table from Jobs Contract 15th Straight Month; Unemployment Rate Soars to 8.5%.

Table A-12

click on chart for sharper image

Let's ignore line U-6, a number I believe is close to the true rate of unemployment and simply look at line U-3, the "official" measure of unemployment.

In December of 2008, unemployment was 7.2. In March it was 8.5. Three or four months from now unemployment will be 9.8, assuming the same pace. However, the pace has been escalating. Add a few more months assuming no escalation in pace and the unemployment rate will be approaching 11% by the end of this year.

In other words, the Treasury's adverse scenario is a complete joke. Moreover, instead of disclosing the results immediately, the results are going to be debated rigged for a week while the Treasury has a week to figure out exactly what they can get away with.

Is this supposed to be believable?

Sobering Stress Test Analysis

The New York Times is commenting on Sobering Numbers Ahead of Stress Test Results.
In a market note Wednesday called “Leaking (and Reeking) of Stress,” two managing directors at Westwood Capital used those figures to run some numbers. They concluded that the government’s worst-case assumptions — what is known as the stress test’s “more adverse” scenario — could imply losses of more than 50 percent in the banks’ Tier 1 capital.

That’s a sobering thought, because Tier 1 capital is one of the most closely watched measures of a financial institution’s ability to weather a storm.

Citing a “confidential document the Federal Reserve gave banks in February,” The Journal reported Wednesday that the government’s more-adverse scenario will assume up to 20 percent losses in banks’ credit-card portfolios, 12 percent losses in their commercial real estate holdings and 11 percent losses on home-equity credit lines.

Using the percentages from the story, Daniel Alpert and Jon Messersmith of Westwood did some number crunching of their own.

They pulled together year-end figures from the Federal Deposit Insurance Corporation for 13 banks undergoing stress tests, including Citigroup and Bank of America, and applied the assumed losses to the assets in question.

The result: A combined haircut of about $240 billion among the 13 banks — or about 56 percent of their reported Tier 1 capital as of Dec. 31.
Sobering Indeed

Using cake-walk assumptions, Westwood Capital still came to the conclusion 56% of Tier 1 capital is going to be annihilated. If that doesn't reek, what does?

Geithner's Meaningless Statement

On Tuesday, Treasury Secretary Timothy Geithner said "the vast majority" of banks could be considered well-capitalized.

Geithner's statement is meaningless. If Citigroup, Bank of America, Wells Fargo and a few others in the Stress Test 19 are all insolvent (they are but it will never be reported that way), it will not matter much if every other bank in the country is solvent. Giethner's statement would have meaning if every bank was the same size. They are not.

Week of Leaks

So no, we can prepare for a "week of leaks" starting Friday, where good news lies are spoon fed to the public in a hopeless attempt by the biggest liars on the planet to gain credibility.

Mike "Mish" Shedlock
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