Weiss research is bombarding readers with preparation on the bank stress tests. Here's their points:
"....bank “stress tests” now being conducted by Washington are little more than a shameless hoax: Based on the irrational assumption that the economy won’t get as bad as it already is!
The regulators’ notion of “stress” is a 3.3 percent economic contraction and 8.9 percent unemployment in 2009 ...
But the economy is already shrinking at the annual rate of 5 percent and unemployment is already at 8.4 percent with the Obama administration itself warning that it could hit 10 percent this year..."
They go on to explain that banks have written down their liabilities to market. Basically, if they owed $10mm and it was trading at fifty cents on the dollar, then they would write down the debt to $5mm and instantly show bottom line profit. Additionally, they contend that Q408 write downs on assets far exceeded what was necessary. By adjusting the assets upward Q1'09, they instantly show a Q1 paper profit. Here is what they wrote regarding Citigroup Q1 report... (and, is this why the market went down that day? Does it explain why all commentators discussed 'quality' of the profits?):
"First, Citigroup deployed the Toxic Asset Cover-Up. By inflating the value of the bad assets on its books, it was able to beef up its after-tax profits by $413 million.
Second, Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving most of its bad-debt losses into last year's fourth quarter and (b) greatly understating its likely losses in the first quarter, the bank legally rigged its books to look like it had made major improvements. Even assuming no further deterioration in its loan portfolio, I estimate this gimmick alone bloated profits by at least another $1 billion.
Third, Citigroup went all out with the Great Debt Sham, marking down its own debt and creating an additional $2.7 billion in purely bogus profits from this maneuver alone.
So here's Citigroup's true math for the first quarter:
So-called "profit" $1.6 billion
Gimmick #1 $0.4 billion
Gimmick #2 $1.0 billion
Gimmick #3 $2.7 billion
Total gimmicks $4.1 billion
Actual result: $2.5 billion LOSS! "
And, on the 'stress test', they go on to say:
"..... They’re reportedly asking, “Will this bank survive if the U.S. economy shrinks 2% in 2009?”
But in the first quarter, the U.S. economy contracted two and one-half times more than that — at an annual rate of 5%!
They’re asking “Will this bank fail if unemployment rises to 8.4% in 2009?”
But unemployment is already higher than that — at 8.5% and more than 600,000 more jobs are being lost each and every week!
Even the regulators’ “worst case scenario” of a 3.3% economic contraction and 8.9% unemployment is a joke:
Not only is the economy already shrinking much faster than 3.3% ... the Obama administration itself has warned that unemployment will be much higher than 8.9% this year!
Nevertheless, on May 4, our leaders will — with great fanfare, I am sure — release the results of this jury-rigged stress test. And you can be assured that it will likely say that, given these mindlessly optimistic criteria, many of our 19 largest banks are “safe.”
AI
