Berk's Blog

President Obama Owns The Stupid Stress Tests

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The latest news on the the top banks’ stress tests is going to be a major focus for the markets over the next three weeks. The latest date on which we are purported to receive the results are due to be published May 4, although some of the results could well be revealed (leaked) prior to that date.

Today, we hear that the federal government will be putting restrictions on the banks that want to give back TARP money as soon as possible.

So let me get this straight. Barney Frank & Co. tells the big bad bank executives that if they want to give back the money they should give it right back. But now that Barney Frank & Co. realize that they have no leverage on running those banks when they give the money back, his lackeys in the Treasury Department get religion and leak that they are no longer going to take back that money without any conditions. In fact, there are reports today that those conditions will include the Treasury department’s certification that giving back the money will not do systematic harm to the nation’s banking system. Who decides – the Treasury Department.

If anybody is wondering why the market is down so much this morning-there you go. The government just couldn’t stay out of the way long enough for the market to gain enough traction for people to start feeling good again.

Tom Brown at BankStocks.com reports today that President Obama himself created these idiotic stress tests that would magically heal the banking system. If it was anyone else in the administration I am sure that the adults would have pointed out to the president that he has any number of regulators whose job it is to consistently stress test the banks let alone the banks’ own managers that stress test their capital all the time.

But when you’re there most powerful man in the world and have no knowledge of business or finance why not make your own plan? Tom Brown writes today in Bankstocks.com:

The Stress Test Is Useless. Or Worse.

        Lots of possible outcomes. None of them good.

President Obama himself is said to have hatched the idea, which is unfortunate. If it had been anyone else, then presumably Larry Summers or Tim Geithner would have pointed out that, um, regulators already stress test banks all the time in the course of overseeing the industry. And those on-site regulators already know a lot more about those banks than any stress-testers in Washington would, and can tailor their tests accordingly. What’s more, it’s a terrible idea to make the test results public, since that might cause unnecessary anxiety among depositors and even, in an extreme case, cause a run for no reason.

But the president must have hit Larry and Tim with one of those visionary-looks-off-into-the-future of his, so stress-test it was. The banks submitted their data weeks ago, and were instructed by the regulators to keep mum on the process. The entire financial industry has been on tenterhooks ever since.

Let’s take a look at what’s so wrong about this misbegotten idea:

  1. The underlying premise of the test is simply mistaken. From what I gather, certain economists reportedly convinced President Obama that the problem with the economy is that banks are refusing to lend, and are instead hoarding capital in order to shore up their wobbly balance sheets. The president seems to think, therefore, that if the banks are force-fed new capital, they can expand their balance sheets and resume lending, which would in turn help the economy begin to recover.There’s just one problem with this thread of logic: its basic premise is wrong. The problem with the economy isn’t that banks that aren’t lending, it’s that the non-banks that make up the “shadow banking system” have gone into forced hibernation. We know the administration knows this, since it has expanded the TALF program, which is designed to help jumpstart the securitization markets on which the non-banks depend for their funding. (My emphasis)

    As for the banks, well, the chart below tells the tale. It was developed by my old partner, Robert Albertson, now the chief strategist at Sandler O’Neill, and it shows bank loan growth during the current recession compared to the four previous recessions. If anything, bank lending has stayed remarkably robust in the face of shrinking demand.