TARP Loans to be Repaid as Stress Test Questions Linger

Brian Hicks

Updated June 9, 2009




Don’t look now, but according to government regulators, everything is just wonderful now for ten of the major U.S. banks that collected billions in TARP money. Go figure.

In fact, things are so great at these institutions that the government has decided to allow them to begin to repay nearly $68 billion in TARP loans. Lord knows we need the dough.

Among them are JPMorgan, Goldman Sachs, and Morgan Stanley, freeing them from added oversight that came along as part of the price tag.

Apparently for them, happy days are here again. Yippee…

Nevermind that unemployment is headed higher, foreclosures are still skyrocketing and housing is nowhere near the bottom. That would only put a damper on things.

In the meantime, reality is doing its best to poke on through as more people are beginning to question how stressful the stress tests really were in the first place.

From the AP by Anne Flaherty entitled: Investigators warn bank stress test not enough

“A government test of whether 19 major banks could survive a further downturn in the economy may have relied on too rosy a scenario and should be repeated, independent investigators say.

In a report released Tuesday, the Congressional Oversight Panel for the government’s $700 billion financial rescue effort found that the Federal Reserve used a “conservative and reasonable” approach to assessing the health of the nation’s biggest banks.

But, the panel added, the Fed’s worst-case scenario does not go far enough. For example, the “stress tests” conducted by the Fed were based on the 2009 unemployment rate average of 8.9 percent. Unemployment in May climbed to 9.4 percent. (Emphasis mine)

“While no one should gainsay the potentially positive results of the tests, it would be equally unwise to think that those results reflect a diagnosis of all of the potential weaknesses or create a necessarily sufficient buffer against future reverses for the banking system,” the panel wrote.

Asked about the findings of the oversight board, Treasury Secretary Timothy Geithner defended the stress tests, saying they were rigorous and used projected loss estimates for the banks that were worse than any two-year period during the Great Depression.

Geithner told a Senate Appropriations subcommittee that the stress tests had been “very carefully designed” and had played an important role in restoring confidence in the system.

Elizabeth Warren, the Harvard University law professor who heads the panel, told lawmakers on Tuesday that the Fed should release more details about how it conducted the tests.

“Without this information, it is not possible for anyone to replicate the tests to determine how robust they are or to vary the assumptions to see whether different projections might yield very different results,” Warren told the Joint Economic Committee.

The Congressional Oversight Panel says that additional capital held by the banks should not be interpreted as an end to the financial crisis.”

So it looks like Nouriel Roubini was right again.

Related Articles:  

The Black Swan: Crisis is “vastly worse” than the 1930’s  

Roubini claims stress tests are “too optimistic”  

The Banks Stress Over the Stress Tests  

The Great Depression’s Ben Bernanke  

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