Stress Tests Worse than Reported

Brian Hicks

Updated May 11, 2009

There’s a reason we always listen to Nouriel Roubini… it’s because he’s usually right.

It was May 5 when he said:

Stess tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.

This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak – $2.7 trillion, double the estimated losses of six months ago.

The stress tests’ conclusions are too optimistic about the banks’ absolute health, although their relative assessment is more precise, because consistent valuation methods were used. Still, with Thursday’s announcement of the results, it shouldn’t be a surprise when the usual suspects emerge. We fear that we are back to bailout purgatory, for lack of a better term.”

And surprise, surprise… he was dead on.

According to the Wall Street Journal, the Fed reduced the size of capital deficits facing several banks before releasing the stress test results. The changes came after days of negotiations with the banks, said the story. “The Federal Reserve used different method than analysts and investors had expected to calculate capital levels.”

Sounds like Geithner has got to go.

“Citigroup’s capital shortfall was initially pegged at roughly $35 billion, according to people familiar with the matter. The ultimate number was $5.5 billion. Executives persuaded the Fed to include the future capital-boosting impacts of pending transactions.”

Here’s more from the Wall Street Journal.

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