What Does "Pass" Mean to You?
| Thu Apr. 9, 2009 8:37 AM PDT
This is a peculiar story from the New York Times:
For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.
....Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.
....Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.
So what have we learned here? First: all 19 banks will pass. Second: not all the banks can be winners. Third: the ones that pass — but aren't winners! — will be propped up by taxpayers. 
Fourth: no, they won't be propped up by taxpayers, they'll be forced to sell assets and raise private capital.
Huh? Which is it? If by "pass," regulators merely mean that a bank won't be instantly seized and its management defenestrated, then I guess this makes sense. Awards for all! On the other hand, the prospect of a bank getting a "needs improvement" grade and then successfully selling a big stock issue to raise private capital is just fanciful. Even banks that pass with flying colors will have trouble doing that.
So what's going on here? Why are Treasury officials privately telling reporters that everyone is going to pass but that some banks will receive a pass-minus and may be required to do things that are almost certainly impossible? Are they just trying to lay the groundwork for failure and temporary nationalization later on? Or what?
I'm having a harder and harder time figuring out what's going on as time goes by. If everything is on the up and up, it doesn't make sense. If there are hidden wheels, though, I'm not sure they make sense either. Just what is Treasury up to?
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Comments
"Are they just trying to lay
Submitted by Anonymous (not verified) on Thu Apr. 9, 2009 9:01 AM PDT.
"Are they just trying to lay the groundwork for failure and temporary nationalization later on?"
Bingo
If you turn the question
Submitted by Anonymous (not verified) on Thu Apr. 9, 2009 9:03 AM PDT.
If you turn the question around, it answers itself. Just what isn't the Treasury up to?
#3 and #4 go together. They will be propped up by the sale of toxic assets to private parties with govt subsidies and guarantees to the private parties. It's the Geithner plan, and it's been rehashed all over the place.
Stress test
Submitted by E L (not verified) on Thu Apr. 9, 2009 9:24 AM PDT.
"I'm having a harder and harder time figuring out what's going on as time goes by." Isn't that the basic objective of the program?
A Possibility
Submitted by Brian O on Thu Apr. 9, 2009 9:28 AM PDT.
I'm beginning to think that these stories are some combination of: 1.) reporters not experienced enough in finance to understand what is actually happening (although Dash has been covering this beat for a while); and 2.) inconsistent leaks from a Treasury department staffed by career employees but with no appointed leadership below Geitner (I'm not sure about the Fed staffers). The story comes from exclusively anonymous sources ("officials" "regulators" "some people involved in the process") who can either disagree or obfuscate with impunity.
The press abhor a vacuum and will continue to write vague stories as the real story evolves in secret (the article notes it is a federal crime to comment on the stress tests' results). We will continue to read speculative stories (Banks will buy their own assets! No that will be illegal! etc.) until actual facts emerge, likely through official channels.
I'm torn on the legitimacy of such a shielded process. Were this the Bush administration I'd be wary, but that is more due to incompetence than politics. Were it George HW's administration I think I'd be willing to accept a necessary lack of daylight at this point in the process. In due time, we'll see how it all works out.
Indeed, and Bloggers who don't get it either
Submitted by The Lounsbury (not verified) on Thu Apr. 9, 2009 11:57 AM PDT.
First Regulators does not mean Treasury. Examiners are not part of Treasury. The Federal Examiners are either Central Bank, or FDIC or one of the other units.
fraudulence is the path of least resistance to acquiring wealth
Submitted by tpx on Thu Apr. 9, 2009 9:35 AM PDT.
Pass means fraudulence is the path of least resistance to acquiring wealth in America.
Fancy pony show?
Submitted by SRW1 (not verified) on Thu Apr. 9, 2009 9:56 AM PDT.
"Just what is Treasury up to?"
Don't know either, but what I'm pretty sure of is that a test with a pre-ordained outcome is not a test. It's just a fancy pony show put on to distract the audience.
I think there's a chance that the overall picture Treasury/Fed is looking at is so frightening that they are just trying to gain time in the hope that the ship will start to right itself at least somewhat.
Maybe they have realized that they don't have and are not likely to get the resources required for a fundamental and sectorwide solution?
Yeah, I think so
Submitted by Anonymous (not verified) on Thu Apr. 9, 2009 7:04 PM PDT.
Yeah, I think so too.
Olbermann wasn't on tonight due to his mother's recent death, but the guy that was on, was nothing but a complete talk show hype artist - telling everyone it's okay to spend now, by saying Wells Fargo turned a dime but Wells Fargo never did particpate in the ARM loans, so big deal.
That crap and recently some (undisclosed) factories had more "productions"? But which ones as the AP never got to that part either. Bush and Cheney cleaned the place out, and were nothing but a couple of looters the used the Whitehouse as clearing house for their friends. - Obama protects them shamelessly like it's no big deal what happened. It looks bad, it looks bad.
Stress tests are not pass/fail
Submitted by gyrfalcon on Thu Apr. 9, 2009 8:54 PM PDT.
Please write this backwards on an index card and paste it to your forehead so you'll see it every time you look in the mirror and maybe actually remember it.
Stress tests are not -- ever -- for the purpose of drawing some red line and anybody below it fails and those above it pass. That's just a totally faulty concept.
THere's no "preordained" result here. Geithner et all made crystal clear from the beginning that they weren't expecting anybody to flunk, only to find out more clearly who was in what degree of trouble.
Please do try to keep in touch.
Dunces abound
Submitted by SRW1 (not verified) on Fri Apr. 10, 2009 9:23 AM PDT.
Well Gee, gyrfalcon, from the trail you left on this topic alone, there is one thing to conclude for sure: you're The Man and everybody else is a moron.
I don't feel so bad though, because I seem to be in good company.
Robert Reich, on Feb 16 at TPM:
The only way to make sense of Tim Geithner’s “stress test” for banks is to assume a kind of triage. Banks that are reasonably healthy right now -- whose assets are fully adequate to fund their liabilities, and can make new loans -- don't need a bailout. And banks that are too far gone to save –- whose loans when realistically valued won’t make them solvent even when the economy recovers -- shouldn't be bailed out. They should be put under receivership that pays off depositors, wipes out shareholders, and then closes the bank.
Sounds a lot like I'm not the only dunce to miss the thing that the stress test was not supposed to be about pass/fail. Would you like me to forward your correction to Robert Reich? He also seems to be in need of an index card.
PS: Don't try to become a teacher.
No Mystery
Submitted by g. powell on Thu Apr. 9, 2009 9:56 AM PDT.
I think the Summers/Geithner team is dead set against bank nationalization and instead are opting to give the institutions public money in exchange for not very much. This requires a political sleight of hand, hence having the FDIC fund TARP v.2 so that they don't have to ask Congress for the money. Also, the stress test were criticized as being way too easy to pass in the first place.
So a policy of stealthy subsidies to the finance sector is the most reasonable explantion for the adminstration's seemingly confusing actions.
Utlimately, this is Larry Summers engaging in a little legacy restoration. He was a driving force behind financial deregulation in the 1990s, and nationalization of those institutions would be an admission of failure.
And if Bush were engaging in exactly the same policies of hidden public subsidies, the Left would be rightly outraged. I have no idea why so many progressives are giving Obama a free pass on this.
most people outside the left blogs aren't so stupid as to believe Obama et al are actually totally corrupt bastards rewarding their rich friends at the expense of the public, that's why.
Get a grip.
It may turn out, with the hindsight of history, to have been the wrong way to go to fix the financial system, but to fantasize this particular group is sitting around chuckling in back rooms about how much taxpayer cash they're funneling to their friends is just childish and self-indulgent nonsense.
don't it seem like at least
Submitted by Anonymous mouse (not verified) on Fri Apr. 10, 2009 1:49 AM PDT.
don't it seem like at least some of these corrupt bastards are laughing in the back rooms? Have you been paying attention?
They F everything, and yet they get to have Joe Public bail them out for their bs shenanigans
Why would they not laugh?
It really doesn't help that the administration and congress either are incompetent or purposefully handling things this way
NO movement (or next to none) on lending even from the banks that are getting boucoux bailout and now have some cash to spread around? What kind of crap is that?
It's the kind of crap you get when the candy store is almost entirely unprotected
g. powell: I have no idea
Submitted by alex (not verified) on Thu Apr. 9, 2009 10:13 AM PDT.
g. powell: I have no idea why so many progressives are giving Obama a free pass on this.
He's "our man", how could he possibly do any wrong?
The Obama/Summers/Geithner plan is just a warmed over version of the original Bush/Paulson TARP plan - the purchase of toxic waste at inflated prices which, thankfully, was never implemented. How blind does somebody have to be not to realize it's a big taxpayer gift to banks that screwed up?
I'm definitely not convinced by the arguments that Obama is playing 12th dimensional chess with the politics of bank receivership. As usual, the simplest explanation is the best. Obama is a Clinton redux, even after the shit has hit the fan. Summers and Geithner are Wall Street buddies who'll do almost anything to save the financial genyuses from their own mistakes. Especially since Summers, as so many Obama apologists seem to have forgotten, helped create this mess in the first place.
While I can't bring myself to be pessimistic quite yet, this insistence on preserving the Paulson/Geither(Summers/Rubin) plan is either the beginning of the end of the plan and its proponents or of the hopes for major progressive change in this country. I still hold on to the hope that it's the former.
Bank Runs
Submitted by Art Eclectic on Thu Apr. 9, 2009 10:35 AM PDT.
I'm thinking that "what the treasury is up to" is trying to prevent bank runs. So, everybody is solvent! Hooray! Meanwhile, people who are fed up with this B.S. are closing accounts at BofA and Citi.
Too big to fail means too big to be making money off of me. I'll go contribute to the bottom line of a bank that isn't actively engaging in fraud.
Boycotting Financial Instiutions
Submitted by bob h (not verified) on Fri Apr. 10, 2009 4:02 AM PDT.
There probably should be a concerted effort to boycott the big offenders. No one is forcing you to renew auto or home insurance with AIG; no one is forcing you to keep your brokerage account at Merrill. Maybe a local community bank or credit union is a better place to keep money than one of the megabanks; maybe there are regional brokerages you could keep stocks and bonds. Managers of 401ks, IRAs, and pension plans could be pressured to avoid buying the stocks of malefactor institutions.
Buying time until profits.
Submitted by BigTom (not verified) on Thu Apr. 9, 2009 10:38 AM PDT.
I think a big part of the plan is to buy time until enough operational profits can be accumulated to allow the banks to self-bail themselves out. Plus TARP/TARF money in the more extreme cases. The current environment, (Treasury gives banks money at effectively zero interest rate, and banks lend it dearly), is designed to allow banks to make big operational profits. This is a much less visible way to give them money than direct bailouts. Note that Wells Fargo just reported a record $3 quarterly profit!
Contrary to popular(populist) opinion, I think this has little to do with the enrichment of their masters of the universe buddies, than it is a desperate plan to avoid financial catastrophe. There just is no easy way out, and this seems to be the only politically nonsuicidal method to avoid catastrophe. At least the money is being printed -rather than becoming a direct liability to future taxpayers. Of course the price for that will be future inflation fighting measures, but at this point the risk of a deflationary depression is so severe, that a little potential future inflation is considered to be the least of our worries.
What's the alternative?
Submitted by AK Liberal (not verified) on Thu Apr. 9, 2009 10:45 AM PDT.
Alex: How blind does somebody have to be not to realize it's a big taxpayer gift to banks that screwed up?
What is the alternative? Nationalization/receivership ala the FDIC model sounds like a good idea until I start to think about what it might take to pull it off.
I listened recently to a story on "This American Life", a blow by blow account of the FDIC taking down a small town bank in Washington. It took eighty FDIC officials and the bank staff working round the clock over a three day weekend to take over the bank and reopen for business. I'm not sure that we have the capacity to take over an operation the size or complexity of Citi or BofA.
AK Liberal: I'm not sure
Submitted by alex (not verified) on Thu Apr. 9, 2009 10:53 AM PDT.
AK Liberal: I'm not sure that we have the capacity to take over an operation the size or complexity of Citi or BofA.
Then we better develop it real fast. I think your concerns are well founded, but the problem with the current approach is not just that we're getting ripped off, but that it won't work. It's Japan redux.
According to everyone I've read that cites actual historical examples of banking crises, as opposed to wishful thinking, the Obama/Summers/Geithner approach simply doesn't work.
This is my theory, and it is
Submitted by Occam (not verified) on Thu Apr. 9, 2009 10:57 AM PDT.
This is my theory, and it is mine.
We must never forget that Geithner, Summers, and Obama have Krell brains.
Paul Krugman is a fool, a meddling idiot! As though his ape's brain could contain the secrets of the Krell!
Ethically and technologically Obama/Geithner/Summers are a million years ahead of humankind, for in unlocking the meaning of nature they had conquered even their baser selves, and when in the course of eons they had abolished sickness and insanity, crime and all injustice, they turned, still in high benevolence, upwards towards space. Then, having reached the heights, this all-but-divine race disappeared in a single night, and nothing was preserved above ground.
Or maybe they are simply corrupt asshole fucktards trying to steal our money.
prevents markets from finding equilibrium
Submitted by tpx on Thu Apr. 9, 2009 11:00 AM PDT.
The financial catastrophe to the economy has already occurred, affecting most people. What Treasury and the Fed want to do is avoid the consequences of the catastrophe for those who depend on the huge, bankrupt financial firms for their wealth: Wall St. schemers and their politicians. The consequences of this loss prevention plan for the rich is to prevent markets from finding equilibrium.
awful ad
Submitted by David (not verified) on Thu Apr. 9, 2009 11:02 AM PDT.
That pop-over add is so awful, your page is unreadable to me. When the close button finally appeared, I missed it slightly and it never came back. Not quite as bad as the stupid tornado on the science blogs website several years ago, but awful none the less.
I might add
Submitted by g. powell on Thu Apr. 9, 2009 11:06 AM PDT.
I'm with Alex on this.
And we're also setting up ourselves up for the next financial crisis by bailing out the institutions that made the stupid mistakes that got us into this mess at minimal costs. The message: take big risks to make profits because Uncle Sam will take care of you.
There is also a moral issue, these are private, profit-making corporations. No matter how expedient, public money should not be given to them unless the govt stands to make all the money on the up side. Although the govt has some shares now, exisiting shareholders still stand to benefit from the govt rescue. That ain't right. They should lose everything. And the non-deposit creditors too.
Big Tom says, I think, the Treasury will eat any losses on its TALF lending, thereby in effect printing money. Though I wish this was true, I think Treasury has explicitly said it will not do this, it will issue new bonds to cover any losses. Besides, if it were printing new money, it would in effect be giving it to bank shareholders through the purchase of bad assets at inflated prices. How can you jusify that?
There is no plan. The tests are a show for the public. The bankers and Treasury are crossing their fingers and hoping that positive PR will somehow rally the public confidence in the banks.
If any banks actually "failed" the "stress test", then there would be too much pressure to declare the bank insolvent, as you say.
And yes, the bankers are ultimately the ones calling the shots here. Obama is in over his head when it comes to finance so he's going to let Geithner, Summers, and Bernanke do what they wish.
Don't be ridiculous
Submitted by gyrfalcon on Thu Apr. 9, 2009 9:04 PM PDT.
*Public* confidence is not at issue here-- at all. And the idea that the public has been breathlessly waiting on the results of the "stress tests" is equally ludicrous. Probably 5 percent of the public has even heard of these "stress tests," and only a fraction of those have a clue what they actually are.
Obama, Geithner et all may have flawed judgment on how to fix this mess, but there's zero question that the "stress tests" had squat to do with public confidence. Good grief.
And there we thought
Submitted by SRW1 (not verified) on Fri Apr. 10, 2009 9:43 AM PDT.
And there we thought banking was all about public confidence.
How stupid!
Banking is all about making
Submitted by Auto Verzekeringen (not verified) on Wed Apr. 15, 2009 11:48 PM PDT.
Banking is all about making money for the shareholders..
occam: We must never forget
Submitted by alex (not verified) on Thu Apr. 9, 2009 11:46 AM PDT.
occam: We must never forget that Geithner, Summers, and Obama have Krell brains.
Any way we can get them to annihilate themselves before we develop fusion reactors?
Or maybe they are simply corrupt asshole fucktards trying to steal our money.
According to your razor, that's a more likely explanation.
I would really like
Submitted by Nat on Thu Apr. 9, 2009 6:54 PM PDT.
I would really like someone float the rumor that in fact nothing is really being planned regarding the toxic assets. The banks assert they are solvent and the administration has its doubts, so they are going through some bail out motions, but nothing is actually going to happen. The theory being that with luck the motions will be enough. All this is just buying time waiting for the economy and the housing market to stabilize and in turn stabilize the banking system. I wonder how Wall St. would react? Let's see what Citi is worth without the Geithner Put. Well, a guy can dream...
As a liberal who supported
Submitted by MadasHelinVA (not verified) on Sat Apr. 11, 2009 4:47 PM PDT.
Obama, I can see that change in the financial sector will never occur unless and until Obama gets rid of Summers and Geithner [both of whom have been a huge part of the trouble creating the financial meltdown] and cleans the industry out instead of making minor changes that include the greatest PONZI SCHEME known to mankind. William Black was the whistle blower in the S&L scandal in the 1980s. and knows we have a COVER UP going on. See the link below for William Black's interview with Bill Moyers [PBS].
http://www.pbs.org/moyers/journal/04032009/transcript1.html
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