The Stress of the Stress Test

As part of the continuing boil in the financial sector, the administration has found a way to add more stress into the scenario by coming up with this bank stress test.

Other than the first mistake of the nomenclature used for this test, (The Stress Test-doesn't do much confidence building) to date no one knows what the methodology these inspectors are using.

One thing that should have been in the minds of the people who were tasked to formulate this financial sector Inquisition is that part of the contributing factors to the meltdown and the continuing clouds overhanging the markets was the lack of transparency and clarity on the issues. By setting this up in the way the administration has, all that has been accomplished is a deeper layer of clouds and doubt over a sector of the economy that is still staggering around from some pretty heavy knockout punches.


Additionally, they are now at a point where there is not much positives to expect out of this process and it has the potential to worsen the situation as this test has now become the litmus test by which the world is going to look in on the US banking system and individual banks to determine who to trust and who not to trust.

If the majority of the banks under review pass this test, could it be a whitewash? What about those who "fail" the test? Are they going to be victims of a failed test, are they going to be forced into the arms of the government via TARP funds? Or, are they going to end up with a run on those banks who fail and thereby create more stress onto the system?

There is no real net positive to come out of this as I see it and one has to wonder why anyone would put in place something like this at a time like this without having some clear plan to produce a positive?


The quick answer is people without long experience make these kinds of mistakes and people who are too concerned about media reports fall into the quicksand of "damned if you do and damned if you don't" and that is exactly where they are on this issue.

This would be like a doctor checking out a patient that he believes has a broken leg and to confirm it he decides to hit the patient on the leg with a hammer to determine if it is broken or not.

This plan is hidden behind the tree of Congress and the administration wanting to make sure the public gets the sense that they are monitoring what is happening with the TARP funds provided to the banks to date and all these billions are being protected. Even if this were a genuine reason, the manner by which they have set this in place is questionable.

Unless and until the banking sector is forced to deal with the real root and disclose and dispose of the toxic assets that they hold no test of any kind is going to be viewed as real or accurate, their quarterly reports are going to have more accounting tricks and twists to try and demonstrate that they are doing well and this crisis is going to extend and the government is going to face an ongoing outflow of taxpayer capital to the banks because the sad truth is most of them are still insolvent. If you are wondering why credit is not flowing, why the economy is not showing much sign of recovery and why the markets are stuck and sliding, this is the major reason.

While we have the lost decade of Japans' economy due to their desire to hide the real problems their banks had and did all they could to shield these banks from the harsh light of day, it seems the powers at be would rather move on this same path rather than follow the one that Japan and other countries had to finally take to restore any confidence in their banks and banking systems.

It is long past time for the government to force the issues regarding these toxic assets and let the chips fall where they may and pick up and get on with it in a post-toxic asset environment.

Believe it or not, left to manage there were and are banks and other financial institutions that would have survived and made it through without the TARP and under a normal and functioning capitalist system, that is what would have happened.

Instead, the TARP is and always was a big rock for these bungling bankers to hide under while the fallout started to fall out of the sky and now what we have are walking, talking zombies who can do more harm than good and are doing exactly that.


Lehman was allowed to fail (I will provide some insights on this in a later blog) and the world did not end even though it produced added pain and destruction but, we are still here and if Bush, Paulson, Bernanke, Obama, Geithner, Reid, Frank, Lewis, Thain and the cast of characters would have just thought things through a bit longer, we would not be where we are now and the stress on all of us would have been much less than it was and is and is going to be.

There was a much better way to manage it and they all failed miserably due to panic, political expediency (Bush and Paulson wanted this solved quickly before leaving office and to take away some of the ammunition that helped the media use to prop up a presidential candidate who had no real clue---stop here Sam!!), panacea and some personal agendas.

Someone has to say it. I just did!



Look for my blog on the better alternative to this crisis that they missed/discarded in the coming days.