Marketplace Scratch Pad

I wouldn’t pass the stress test

Scott Jagow Apr 10, 2009

The banks are stressing me out. I can’t stand all the secrecy and the magic accounting tricks and the government’s indecipherable measurement tools. Was Wells Fargo’s CEO right when he called the bank stress tests “asinine?”

Here’s what Richard Kovacevich said a few weeks ago:

“We do stress tests all the time on all of our portfolios,” Kovacevich said. “We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.”

The tests are supposed to determine which of the 19 largest banks need to raise more money from private investors. But former government regulator Barbara Matthews pointed out on Marketplace this week the design flaw here:

It becomes very tricky, though, doesn’t it? Say you’re a bank. “Hi, my stress test came out really badly. Please could you give me money?” That’s a very difficult sell to a private capital market.

Bloomberg says the Federal Reserve has told banks to keep quiet about the stress test results until late April, after 1st quarter bank earnings are out:

“If you allow banks to talk about it, people are just going to assume that the ones that don’t comment about it failed,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

And then the short sellers will swoop in and feast on the carcasses of the most rotten-looking banks, driving their shares to nothing. But I imagine that’s going to happen no matter when the results are released.

It just shows you that the government can talk about transparency, but when it comes down to it, the taxpayers are left to trust what the Fed is doing. Just like last fall, when Bernanke and Paulson said, trust us, the economy is in imminent danger if we don’t pour hundreds of billions of dollars into these banks.

Maybe they were right, but it’s the not knowing that’s so stressful.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.