So The Treasury Was Lying After All?

[KoKo]

Tuesday, April 21, 2009
So The Treasury Was Lying After All?
Posted by Tyler Durden at 2:54 PM
After all the brewhaha yesterday by the Treasury that they had nowhere, nohow released Stress test results, the Associate Press (a little more credibility than an alleged white supremacist) has just come out with an exclusive that claims it has seen a Federal Reserve document discussing the stress test implications - yes, Denninger was right, and the Treasury was lying. This seem to lend much more credibility to Hal Turner's disclosure from yesterday.

According to AP, the stress tests "take a harsher view of loans than of other troubled assets. That approach favors a few Wall Street banks while potentially threatening major regional players."

The regulators' focus could spell trouble for big regional banks undergoing the tests. Their portfolios have more individual loans and fewer of the big pools of securitized loans that Wall Street giants specialize in.

Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system.

Regulators also face pressure to highlight the weaknesses of some banks, or critics will dismiss the tests as a whitewash. That would undermine the goal of improving confidence in the financial system.

Under one scenario, the test assumes banks will see "no further losses" on these complex securities at the heart of the credit crisis. By contrast, it estimates that the banks' individual loans will lose up to 20 percent of their value.

The methodology "certainly penalizes those banks that are more involved in traditional banking, which frankly have been performing better in recent months," said Wayne Abernathy, a former Treasury Department official now with the American Bankers Association.

He said banks' loan portfolios have lost only about 5 percent of their value so far, whereas the value of complex securities are down 30 to 40 percent.

The soap opera continues. At this point there is really nothing else to say.

http://zerohedge.blogspot.com/2009/04/so-treasury-was-lying-after-all.html


and MORE....................................


http://www.nakedcapitalism.com/

Stress Tests Favor Big Trading Firms Over Regional Players
Listen to this article. Powered by Odiogo.com
Since the Associated Press has not yet had its position on fair use defeated in court, you'll have to go visit them to read the text of their "exclusive" story. It is a doozy.

But by any standards, the broad outlines confirm yet again that crony capitalism trumps taking the best course of action for the financial system.

The AP report, based on Federal Reserve documents in the new service's possession, finds that the stress tests are tougher on loans than other troubled assets. That in turn means regional banks, who do not have big trading ops but do have big loan books, will fare worse than those with lots of CDOs and funky derivative exposures.

We said some time ago that if the stress tests gave poor marks to Fifth Third (a well run bank with far cleaner accounting than the industry as a whole, but a terrible geographic footprint, namely Michigan, Florida, and Ohio) fares poorly but not Citi, you know the test was skewed. That appears to be where things are headed.

Why is being hard on loans but not on securities a distortion? Many structured products (and most of the troubled securities fall in that category) have what is known as embedded leverage. That means an increase in defaults, or other fall in cash flow can have a disproportionate impact on the value of the instrument. That's why, for instance, some CDOs were downgraded from AAA to junk in an afternoon. That's an impossible occurrence with a loan book, absent a catastrophe like the Yellowstone caldera blowing up. Even when loan books decay, they do so in a linear fashion. Complex securities often decay much faster (with structured securities, particularly when certain levels are breached).

Of course, the tacit assumption may be that enough of this dreck can be dumped on the Fed via the TALF that it doesn't mater (yes, the TALF technically makes loans, but the TALF, like the public private investment partnership, can serve to validate phony valuations too).

The other reason this is a bad approach is that it favors the big players when there are ample reasons to put the medium and smaller sized players forward instead. Bank analyst Meredith Whitney has recommended having policies promote regional banks, since they are closer to borrowers and have some (in many cases, a lot) of the apparatus in place to make old-fashioned lending decisions, rather than rely on FICO and simple score based methodologies that have proven to be hopelessly flawed.

[Metta]

1. Geithner and Summers are looking for ways so the banks don't have to pay us back.

Good old boys. Happy karma, boys.

[stillcool]

2. I don't understand...

I didn't yesterday, and I don't today.

The Fed is scheduled to detail its methodology for the tests on Friday and release the
results May 4.

The regulators' focus could spell trouble for big regional banks undergoing the tests. Their portfolios have more individual loans and fewer of the big pools of securitized loans that Wall Street giants specialize in.

Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system.

Regulators also face pressure to highlight the weaknesses of some banks, or critics will dismiss the tests as a whitewash. That would undermine the goal of improving confidence in the financial system.

------------------
Regulators are running the tests on all financial institutions with assets of at least $100 billion. The 19 institutions on the list include an insurer, Wall Street brokerages and regional banks, such as Cincinnati-based Fifth Third Bancorp and Cleveland-based Keycorp.

[KoKo]

3. I just added another post to the OP about how "stress test" will favor Regionals over the Big Banks.

http://www.nakedcapitalism.com/

Stress Tests Favor Big Trading Firms Over Regional Players
Listen to this article. Powered by Odiogo.com
Since the Associated Press has not yet had its position on fair use defeated in court, you'll have to go visit them to read the text of their "exclusive" story. It is a doozy.

But by any standards, the broad outlines confirm yet again that crony capitalism trumps taking the best course of action for the financial system.

The AP report, based on Federal Reserve documents in the new service's possession, finds that the stress tests are tougher on loans than other troubled assets. That in turn means regional banks, who do not have big trading ops but do have big loan books, will fare worse than those with lots of CDOs and funky derivative exposures.

We said some time ago that if the stress tests gave poor marks to Fifth Third (a well run bank with far cleaner accounting than the industry as a whole, but a terrible geographic footprint, namely Michigan, Florida, and Ohio) fares poorly but not Citi, you know the test was skewed. That appears to be where things are headed.

Why is being hard on loans but not on securities a distortion? Many structured products (and most of the troubled securities fall in that category) have what is known as embedded leverage. That means an increase in defaults, or other fall in cash flow can have a disproportionate impact on the value of the instrument. That's why, for instance, some CDOs were downgraded from AAA to junk in an afternoon. That's an impossible occurrence with a loan book, absent a catastrophe like the Yellowstone caldera blowing up. Even when loan books decay, they do so in a linear fashion. Complex securities often decay much faster (with structured securities, particularly when certain levels are breached).

Of course, the tacit assumption may be that enough of this dreck can be dumped on the Fed via the TALF that it doesn't mater (yes, the TALF technically makes loans, but the TALF, like the public private investment partnership, can serve to validate phony valuations too).

The other reason this is a bad approach is that it favors the big players when there are ample reasons to put the medium and smaller sized players forward instead. Bank analyst Meredith Whitney has recommended having policies promote regional banks, since they are closer to borrowers and have some (in many cases, a lot) of the apparatus in place to make old-fashioned lending decisions, rather than rely on FICO and simple score based methodologies that have proven to be hopelessly flawed.

[stillcool]

4. I understand that...

it's what they're lying about that I don't get.

[KoKo]

6. Want to protect the banks they came from? Geithner, Paulson, Summers...

Goldman Sachs..Rubin (Clinton) CitiBank...etc. ???

Protecting their own to swallow up the little banks. And, using our tax dollars to help do it? :shrug:

[stillcool]

8. yeah...I get that!

what I don't get is who is lying about what.

[girl gone mad]

9. Okay..

I'll do my best here.

Yesterday an alleged white supremacist posted alleged bank stress test results on his web site. The story caught fire, probably because the numbers were worse than dire. Treasury was eventually asked for comment and their response was "it isn't possible that anyone could have seen stress test results because the results aren't in yet" (or something to that effect).

Now we have an AP reporter claiming to have seen the results, too. In light of this, it looks like Treasury issued a dishonest statement. Why they even commented on the story in the first place is a mystery to me. Why they would lie rather than simply say "the reported numbers are wrong" may not be quite as much of a mystery.

[DJ13]

5. So instead of facing reality, that the big bloated national banks are near dead

...the answer they come up with isnt to do an FDIC like takeover and break them up, but to lie about their health?

Wasnt creating their own reality a Bush administration tactic?

[Double T]

7. Everyone involved in wall street and the financial institutions is lying.

Financial and economic corruption and malfeasance are what has made America 'great'; no one should ever expect that to change. The treasury and wall street have always been bizarre bedfellows.