Federal Bailout-Too Funny, The Stress Test Results Were Cooked Books, Negotiations Over Test Results

Federal Bailout - Stress Test Negotiations Call Into Questions Results...

I Love it we can't be honest with the American People For One Stinkin Second!!!

Well come on now...we can't tell the American People We Are Another 68 Billion in the Hole! That would be wrong...


Honesty best policy on stress tests

Leela de Kretser
May 12, 2009 12:00am

IF the US Government wants its citizens to truly begin trusting the banks, it might want to start trusting the people enough to be honest with them.

After yet another week of growing optimism and a surging Dow, we've just learned that the results of the Federal Reserve's stress tests on banks - touted as the most comprehensive study done of the industry - aren't as clear cut as first made out.

The Wall Street Journal revealed that Fed officials had significantly cut the size of the capital deficits facing several banks after spending two weeks negotiating with executives over the results before they were released on Thursday.

Thanks to the silver tongues of its executives, Citigroup went from a capital shortfall of $US35 billion to $US5.5 billion in the Fed's much-vaunted report, which looked at how much money the banks would need if Depression-like conditions continued over the next two years.

Wells Fargo's deficit shrank from $US17.3 billion to $US13.7 billion and Bank of America had nearly a third taken off an estimated $US50 billion capital hole. Instead, the central bank said it lacked a necessary $US33.9 billion to fight off the worst-case scenario used in its stress tests.
It seems when the Fed submitted its preliminary findings, executives at more than half the banks flipped out, insisting they were not being given enough credit for future transactions or revenue growth.

Amazingly, given the recent history of the American financial system, when the banking executives pushed back the regulators suddenly became much more optimistic about many of the banks' future performances.

Not only did Fed officials apparently cave in to angry banking executives over the size of capital holes, but the Journal also revealed that the regulator used a far gentler measurement to test the banks than many investors and analysts had expected.

Instead of regulators employing the more commonly used metric to assess capital levels, known as tangible common equity, they opted for another measurement called Tier 1 common capital.
This, an analyst told the Journal, meant that the banks' combined shortfall was $US68 billion less than it would have been under the first method.

Over the coming days, we can expect to hear the banks on the defensive, arguing that the Federal Reserve was out of its mind to come up with such large numbers in the first place. The banks, the executives will argue, simply helped the Fed come to a clearer understanding of what these numbers should be.

The problem, of course, is that the new government rode to power on the promise that it was going to get tough on Wall Street.

This, remember, is supposed to be a new dawn when it comes to financial regulation. Letting the banks do it themselves just resulted in catastrophe.

And even if most Americans lack the financial smarts to wade through a report on capital requirements at banks, they surely know when they're being whitewashed.