Even after accounting tricks, Four big banks fail Fed stress test
The Fed recently released results of its “stress test” in which it analyzed 19 major banks through a hypothetical “nightmare scenario.” In the end, four big banks failed—Ally Financial, MetLife, SunTrust, and giant Citigroup—while 15 allegedly passed. But the devil is in the details.
TIME Business reports,
In the end, 15 of the 19 plans passed muster, with only Ally Financial, MetLife, SunTrust, and somewhat surprisingly, Citigroup’s, plans being rejected by the Fed. The upshot to this action is that those four institutions won’t be able to increase dividends to shareholders or buyback shares – moves that would benefit investors but weaken the banks ability to survive another financial crisis.
The nightmare scenario envisioned by the Fed in these tests was a crisis that triggers 13% unemployment, a 21% drop in housing prices as well as economic slowdowns in Europe and Asia. The Fed was forthright about the tests as well, releasing an 82-page report detailing its methodology and assumptions. . . .
The release did not come without hiccups or its skeptics.
Skeptics indeed, and rightfully so: According to critic Christopher Whalen, these stress tests were basically Fed-manufactured propaganda to protect big banking cronies. He writes,
[W]hen I look at the Fed stress tests, which seem to be the result of a mountain of subjective inputs and assumptions, the overwhelming conclusion is that these tests are meant to justify past Fed policy. Policy like alowing large banks to pay dividends and, especially, move loan loss reserves back into income by most of the TBTF banks. Significantly, US Bancorp and smaller institutions have generally not played this dangerous game with loan loss reserve releases back into income because they could easily cover the dividend.
In other words, with a little “smoke and mirrors,” it seems good and right that banks are back to old accounting standards in order to justify raising dividends for shareholders; and the Fed is the hero for upholding all things by the word of its power (Hebrews 1:3).
But in reality, fudged real estate numbers are the 900-pound gorilla in the room:
But as we have written over the past several weeks in The Institutional Risk Analyst, the Fed does not want to believe that there is a problem with real estate. . . .
Since real estate is half the total $13 trillion balance sheet of the US banking system and more like 3/4 of total exposure if you include RMBS, how does the Fed manage to keep total real estate losses below $150 billion in the stressed scenario? Again, the Fed party line is that there is no problem with real estate. . . .
Again, this to protect the banks. As Whalen explains, it was pressure from the banks that pushed the Fed to assume unrealistic values for real estate on the banks’ balance sheets.
But to be fair to the Fed, they are looking at the same baked and spun disclosure from the TBTF banks as we all. There were reports that the Fed initially wanted to ignore the 2009 FASB rule changes in fair value of illiquid assets, but banks pushed back and insisted on “new GAAP” as the rule.
This indicates that the Fed’s alleged “nightmare” is more like flying in a blue dream. The banks and the Fed are still pretending that real estate assets are still valued closer to what they were before the 2008 crisis.
So the real nightmare will come when they wake up.
No comments:
Post a Comment