First off, we have the white paper right here (and it is technically called the Supervisory Capital Assessment Program (SCAP) not a “stress test.” Although, I can see with an acronym so close to SCAB, they wanted to make sure the public though of it as a”stress test.”):
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090424a1.pdf
(h/t: Calculated Risk)
A lot of smarter-than-me people have questions about the white paper and how the SCAP is actually going to work. Calculated Risk quotes Bloomberg quoting a bunch of analysts calling the white paper worthless. Where’s the rates used to calculate losses in the twelve categories of loans?
http://www.calculatedriskblog.com/2009/04/feds-white-paper-more-should-be.html
Justin Fox over at Time Magazine’s Curious Capitalist blog argues that the tests are not a joke. Well, he argues that they may be a joke, they may not be, but they are not a pointless exercise. The baseline scenario the government used had unemployment topping out at 8.8% and the economy growing at 2.1% next year. The adverse scenario has next year’s growth at 0.5% and unemployment topping out 10.3%. Fox notes, as did Calculated Risk, that the adverse scenario may now be the actual baseline scenario.
http://curiouscapitalist.blogs.time.com/2009/04/24/first-of-all-its-not-a-stress-test-its-a-scap/
Ryan Avent over at Portfolio.com argues that there is no need to push for the more adverse scenario and the tests are stressful enough:
http://www.portfolio.com/views/blogs/market-movers/2009/04/24/stressful-enough
Free Exchange cites Avent, and points out that all future scenarios are “fruitless speculation.” “For example, if unemployment reaches 10.3%, how many people does Treasury expect to default on their credit cards? The report claims default rates on consumer and commercial loans are calculated using historical data. They estimate and apply the historical relationship between default rates and macro variables to their projections. But how far back does that history go (10 years? 30 years?) and will that relationship be relevant in the current environment? There’s a lot of scope to slip in less than stressful assumptions.”
http://www.economist.com/blogs/freeexchange/2009/04/slipping_markets_a_valium.cfm
On the other side of the debate, we have Krugman’s classic line about the stress tests being like “a class in self-esteem:”
John Cole calls it the “Lake Wobegon School for International Finance” where “everyone is exceptional, but some still need trillions.”
http://www.balloon-juice.com/?p=20414
Commentator Raven at Balloon Juice (8th comment on the thread), FTW: “All the banks are strong, all the CEOs are good-looking, and all the investments are above average.”
(For those who do not understand the reference: http://en.wikipedia.org/wiki/Lake_Wobegon)
Megan McArdle noted on Friday that stocks were up from the good news from the stress tests. Her analogy was not Garrison Keillor, but Kindergarten, where “everyone gets a prize for participating.”
http://meganmcardle.theatlantic.com/archives/2009/04/de-stressing.php
The New York Times story about the stress tests is here. Banks started to find out how the did this past Friday, presumably without remarks like “needs to work better with others” or “needs to be quieter at nap time.”
http://www.nytimes.com/2009/04/24/business/economy/24bank.html?_r=1&hp
Kevin Drum argues with the Times article: “…it’s a fantasy to think that any bank ‘on the verge’ will be able to raise private capital, and the Treasury’s TARP money is nearly exhausted. So then what?”
http://www.motherjones.com/kevin-drum/2009/04/stress-test-update
Mickey Kaus wonders if Fed and Treasury really think that can keep the results quiet until May 4:
http://www.slate.com/blogs/blogs/kausfiles/archive/2009/04/24/news-you-can-schmooze.aspx
Speaking of keeping quiet on the results, an interesting side bar. Apparently, on Monday, bank stocks slid after a blogger named Hal Turner reported that he had the results and “of the nation’s 19 top banks, 16, according to Mr. Turner, are ‘technically insolvent.’” The Times reported this blogger has been called a white supremacist by monitoring groups and supported “an Aryan leader suspected of plotting the assassination of a federal judge in Chicago.”
http://www.nytimes.com/2009/04/24/business/24turner.html?ref=economy
No results of stress tests here. We’re not that powerful. Any new posts, put ‘em in the comments.
UPDATE: Paul Krugman:
http://krugman.blogs.nytimes.com/2009/04/26/thousands-of-banks-watch/
UPDATE #2: Ian Welsh at Firedoglake:
http://firedoglake.com/2009/04/27/evaluating-geithners-stress-test/
