Was The Stress Test A Con All Along?

By: Charles Cooper
Topics: In The News

(CBS)

Wall Street finished the week with another champagne-popping rally as investment managers exhaled after the government published the results of its stress tests on the nation's major banks.

The healing process has begun, Quincy Krosby, the chief investment strategist at Hartford Investments told the New York Times. "You're seeing more conviction buying the banks, where investors are culling the weak from the strong and going into the strong names. The strong will get stronger and the weak will get weaker."

But the headlines buried the real lede.

On the face of it, Wall Street's rally came in response to the better-than-expected news that 10 of the banks must raise $75 billion in new capital. Turns out, however, that the banks had a significant hand in shaping the outcome of their own government-administered exams.

The Wall Street Journal is reporting that that the smaller-than-expected deficit number came about because the Federal Reserve applied a "different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits." The Journal reported that:

"when the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed's exaggerated capital holes. A senior executive at one bank fumed that the Fed's initial estimate was "mind-numbingly" large. Bank of America was "shocked" when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations."

Quoting sources said to have first-hand knowledge of the process, the Journal said that "at least half of the banks pushed back." The argument: The Fed had low-balled the banks' ability to make good on "anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions."

In the haggling that ensued, the banks also complained that regulators' initial findings were much stronger than the government's methodology would report. The Times is reporting that in order to offset any capital shortfall, the banks were allowed to use asset sales they had already booked "as well as profits that were better than the government projected for the first quarter."

Of course, not every bank's projected capital needs got reduced. Some institutions were informed they had a capital shortfall whereas earlier, their managements had been under the impression that they would not require new capital. For the most part, however, the stress test revisions came as a pleasant surprise. Most important, the news fostered the impression that the state of the banking industry was a lot better than many had feared.

As the story behind the story begins to trickle out, Barry Ritholtz, the CEO and director for equity research for Fusion IQ, called the exercise "one giant joke-and the laugh is on the taxpayers."

"The Stress Tests were done using 'Tier 1 common capital' as a yardstick," he wrote on his blog. "We can assume that was also pushed by the banks, rather than the expected metric "tangible common equity." That measure would have required another $68 billion in capital."

If all this works to restore confidence in the financial system, then Treasury Secretary Tim Geithner will have realized what he set out to do and reestablish calm. In the meantime, though, he's going to hear accusations that the stress test was a con game from start to finish.

Charles Cooper is an executive editor at CNET News. He has covered technology and business for more than 25 years, working at CBSNews.com, the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet. E-mail Charlie.

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by HROLLER30 May 11, 2009 9:06 PM EDT: JPMorgan investigated for planting "moles" in Wamu;

http://www.kccllc.net/documents/0812229/0812229090501000000000002.pdf

Wamu TRUTH;

http://www.wamutruth.com/

http://wamuqd.com/

http://www.wamu-shareholders-resources.com/wamued.html; Reply to this comment


by burneb May 10, 2009 9:13 PM EDT: I see a lot of negative comments here from people who do not seem to know much about how the US banking system really works or the resulting impact. What we have here is a failure to regulate, from about 2003 to 2008.

These major banks have enormous earning power and capacity to recover when they stop doing stupid things and resume sound operations. And they WILL do it if that is what it takes to end Fed controls and resume paying their top brass obscene amounts.

Yes, it is unfair that so many greedy reckless finance execs still have their jobs and their fortunes while taxpayers take the hit. But we would be in for a longer deeper depression without the steps the Feds are now taking. They are trying instead of just ********, and we are likely to see at least some of the money back.

Bad as it is, we would hate the consequences of the alternatives worse.; Reply to this comment


by woodjd42 May 10, 2009 12:00 PM EDT: HAIL OBAMA???
Posted by walt1944

While I agree more attention needs to be on the people and less on the special interest and I don't really agree with the bailouts, you need to look at who started the whole mess. Not Ovama, but bush/chaney. Those two crooks put us in this mess and they are the ones that started the first bailout fraud. bush/chaney should be tried for destroying this country which they did their best to do.; Reply to this comment


by walt1944 May 10, 2009 9:49 AM EDT: How about giving the average UNEMPLOYED worker a "stress test" to see how well off they are????

Instead, the government is more worried about how "stressed out" the banks are! And, if they are "stressed out", Geitner will just open the government's checkbook again and hand the freshly printed cash over to them!

Meanwhile, unemployment is at 9% officially, 16% unofficially, people are losing their homes, prices are beginning to go up (with all that new "funny money" around, that's not surprising!) and bankrupt companies like Chrysler are allowed to close up plants here and open them in Mexico!

Whatever happened to the philosphy that its the PEOPLE that MOVE the economy, NOT BofA, Citigroup, AIG, Morgan Stanley, or GM????

HAIL OBAMA???; Reply to this comment


by woodjd42 May 10, 2009 9:14 AM EDT: stoltz61, american_11-2009

I am amazed to see someone that just don't attack the other side. A politician is a politician and until people wake up and see that nothing will change.
We need to kick every career politician out of office and put people in that understand that public service is representing the people not their pockets and lobists.
My hat is off to you two.; Reply to this comment


by stoltz61 May 10, 2009 8:56 AM EDT: Everything that this government promotes is a con game! The government continues to dumb down the people so they can push their agendas! Obama the great one and his cabinet are no different than Bush and his cabinet! Nearly all his appointees are tax evaders or con men! We need to stop paying taxes and get our government back so it will represent the people and not their pocket books. This nation is controlled and ran by the same people that took the entire world into a recession!; Reply to this comment


by specialty8 May 10, 2009 8:51 AM EDT: what can you expect from a community organizer who has never even ran a car wash.; Reply to this comment


by american_11-2009 May 10, 2009 8:50 AM EDT: Gee people are surprised that this is just another Con job by Obama and his Con men! People need to get real and wake Obama is just another Politicians. Politicians of both parties are all about them, their Party and their Lobbyist! You will never go wrong by expecting lots promised and little results, mixed in with lots of Spin and out right lies from any & all Politicians! PS.......... the most unethical group in the USA are Lawyers Except Politicians with an Law degree!; Reply to this comment


by woodjd42 May 10, 2009 8:09 AM EDT: I know one thing for sure. It was a waste of the U.S. taxpayers' money.
Posted by seezero1 at 1:58 AM : May 10, 2009

Like the NYC "photo op" flight?

What, did you expect Obama to change THAT?
Posted by weedapoopl

If you are just putting Obama down for wastful spending, you are a fool. You're one of those reps that justify everying the reps do or dems that justify everything the dems do.
Hell look at all the waste by bush, clenton and everyone of the politicians. The only differance between all the politicians and bush is that all the politicans just steel us blind, bush stole us blind and was responsible for also killing many of our young men and women.
I hate all politicians and don't trust any of them but I hate bush/chaney the most as they are the evilist administration in history. Clinton was bad and I mean bad but compared to bush/chaney he was an angel.; Reply to this comment


by weedapoopl May 10, 2009 7:26 AM EDT: I know one thing for sure. It was a waste of the U.S. taxpayers' money.
Posted by seezero1 at 1:58 AM : May 10, 2009

Like the NYC "photo op" flight?

What, did you expect Obama to change THAT?; Reply to this comment