Stress Test Results Announced

As I wrote about in my last report the bank "stress tests" are a sham in part because the trajectory of even the worst case stress test scenario (called "more adverse" by the regulators) has already been exceeded to the downside by real-world economic results.

Worse than that, the "stress test" allowed banks to set their own prices using methods that you and I are not allowed to see. As we know, banks have been especially bad at figuring out the prices of their assets, and, without exception, have always erred on the sunny side of the asset projection landfill. At least that's been true for several years running. Now you are supposed to believe that they've got it all suddenly right, and, to help you really believe in these results, the government and banks will not release the actual methods or prices used.

And worse than THAT, the stress tests are limited to the standard loan portfolios of the banks and do not include the lion's share of the derivatives that they are carrying on their books. You know, the things that have actually caused more bank assets to go up in smoke than any other bank holding.

After we move past these small problems, we then have to contend with cheerleading-style reporting that is so transparently in the "rah-rah" camp as to be embarrassing.

If the Times and other print media are wondering why they are losing customers and money and in danger of going out of business, I would strongly encourage them to begin with an autopsy on this article as an exemplar of "what they're doing wrong."  I actually winced when I read this account in the New York Times:

U.S. Says Ailing Banks Need $75 Billion

Verdict More Upbeat Than Prior Scenarios

WASHINGTON — After subjecting the nation’s biggest banks to the most public scrutiny in decades, federal regulators ordered 10 of them on Thursday to raise a total of $75 billion in extra capital and gave the rest a clean bill of health.

*sigh* I hardly know where to begin here. There's so much wrong already in the sub headline and opening sentence that analyzing it is like being asked to critique the strategic use of the soccer pitch by your 3-year old son's Pee-Wee league team.  Where does one start? 

I guess I'll begin at the top.   I have no idea what they mean by "Verdict more upbeat than prior scenarios." What prior scenarios?  Were there any?  What are they talking about?

The scenarios used by the government, as I've already catalogued, were not nearly as severe as actual real-world results. Unemployment, GDP, and housing prices are ALL already on trends that surpass the worst-case scenario of the government stress test. So which scenarios are they referring to?  It can't be the government stress-test scenarios, because those were more upbeat than reality itself, so I really have no idea.

Next, I might note the clumsy use of opinionated and upbeat language, such as that bolded in the quote above.  For example, I could easily take exception to the "subjecting…to the most public scrutiny" opinion, because banks are regularly subjected to equal scrutiny with every quarterly SEC release. There is literally no new information coming out of the banks as a result of this stress test. At least none that I know of.  I would kind of expect that "the most public scrutiny in decades" would be accompanied by some additional data that could be seen by the public.  Otherwise, it's not really "public,"  right?

As to the "clean bill of health," this, too, is an unsupportable claim, due to the exclusions and limitations of the stress test. That sentence should come with an asterisk (*), and the footnote should read:

(*) Under the conditions of the stress test assumptions, which have already been exceeded, and further assuming the banks have been forthright and accurate in their self-assessment of losses to date and future risks and that there are no substantial or material impacts from their existing portfolio of derivatives, which we did not even ask about, let alone examine.

In this next paragraph, the NYT article carries on in the same manner as in the opening sentence:

The stress tests were aimed at estimating how much each bank would lose if the economic downturn proved even deeper than currently expected. But regulators gave the banks a break by letting them bolster their capital with unusually strong first-quarter profits and also by letting the banks predict modest profits even if the economy again turns down.

You know, I think it's great when individuals are given a break and can post unusually strong earnings and are allowed to optimistically predict modest profits, even during a tough patch.

But I think it's an obvious travesty of regulatory competence when the same courtesies are extended to failed institutions, receiving public money, that have repeatedly exhibited a complete inability to conduct themselves in a trustworthy or responsible manner.

In the meantime, I might note that everybody but the NYT and their desperately sinking journalistic brethren seems to have figured out that the "unusually strong first quarter profits" recorded by the banks were the result of an arbitrary and fictitious gain due to a mid-flight accounting rule change.

I took the liberty of rewriting that final sentence in the above quote box for the NYT.  This is an equally biased and equally valid opinion piece compared to what they put forth, only I am being upfront about it. Here it is:

Inexplicably, despite repeated past failures by these same banks to properly assess risks or manage their operations in a responsible manner, regulators failed to deduct one-time profits resulting from a politically motivated accounting change, and even went so far as to allow banks to predict profits under worse economic conditions than those which have already caused them to lose money at the fastest rate ever recorded.

That's the same information, only I spun it one way while the NYT spun it the other.  The difference is, I stuck mine in a blog with a caveat, while the NYT put theirs above the fold on the front page as a news article.  Frankly, the NYT could stand to hire a few Wikipedia editors, who would have shredded the opinions and unsupported claims from that article in seconds.

Just for kicks, see if you can spot the not-so-subtle phraseology and framing that is used to offset those for and against the stress tests:

“The results off the stress tests should put to rest the harmful speculation we have seen over the past few months,” declared Edward L. Yingling, president of the American Bankers Association, hours before the results were even made public.

“With the clarity that today’s announcement will bring, we hope banks are going to get back to the business of banking,” Timothy F. Geithner, the Treasury secretary, said Thursday.


“It’s window-dressing,” said Bert Ely, a longtime bank analyst based in Alexandria, Va. Mr. Ely was particularly skeptical about letting companies bolster their balance sheets by converting preferred shares to common. “That won’t add one extra dollar to a bank’s capital buffer against losses,” Mr. Ely complained. “It’s just moving capital from one place to another.”

Geez - don't you just hate skeptical complainers and prefer those who bring clarity and hope and can put to rest harmful speculation?

Okay - I was being sarcastic there. What I wanted to point out is that the NYT used the actual hopeful words of the proponents of the stress tests with a neutral presentation style, but then actively inserted the words "skeptical" and "complained" to help shape our opinions of the critic of the stress tests.

These are not terribly subtle attempts at emotional and psychological control of the reader.  Ever since I have learned to spot them, I have lost a tremendous amount of respect for the NYT, et al., and find myself unable to read their articles as anything other than opinion pieces.  Why would I subscribe to such a newspaper?  As a capitalist, I have a strong belief that propaganda should be free.

Finally, here's my prediction from the Martenson Report on the stress tests, released on Sunday, May 3rd, 2009:

The stress tests will reveal that everything is mostly okay. For appearance's sake, a few banks will be shown to need a modest amount of capital, but this is only because the Treasury doesn’t think it can get away with simply proclaiming that everything is 100% good at every bank.

I advise you to tune out what is certain to be an upbeat assessment of the condition of our banks, when the stress test results are finally released. My opinion is that the stress tests were specifically designed to be neither stressful nor revealing. Instead, they were designed to produce expected results for the purpose of instilling confidence in banks and in the crisis management team.

I would speculate that the stress test results will lead to a stock market rally, stronger bond prices, and falling gold prices. This has been a fairly reliable pattern after economic news is released, especially if the news is big enough and politically charged. The stress tests meet these criteria in spades.

Were I holding any stocks that I wished to unload, I would use any such rally as the perfect vehicle to accomplish that task.

As of this time, stock futures are up on the announcement.



This is a companion discussion topic for the original entry at

Awesome commentary Chris.
So I guess the question is this:

What happens when the sham is exposed and the actual losses turn out to exceed the "stress test" scenarios?  My guess is that the markets will experience a little stress test of their own.  And when will the gig be up?  What is left of the Fed-Treasury’s public credibility ought to be shot after this all in move eventually gets called.

If I could ask for something to happen in the US political chambers, it would be something like this:

Brilliant post, chief!
I thought Merideth Whitney summed it up perfectly when she said (paraphrased from memory), "Ask me how I’ll be in two years time and leave it up to me to decide how to perform the analysis… That’s easy! I’ll be thinner, blonder, prettier and younger-looking! What else would you expect me to say?".



I know this will make you feel better…
Geithner Bets U.S. Can Avoid Japan Trap Through Bank Earnings

The “stress-test results are an important step forward,” Geithner said in a statement announcing the results. “Americans should know that the government stands behind the banking system and that their deposits are safe.”

The headline on Thursday’s South China Morning Post reads "HSI Passes 17,200 amid Optimism over US banks". The Hang Seng is up over 10% in the last 3 days, and the media are attributing the strength to confirmation from the U.S. that the financial crisis is now ending. Unfortunately I don’t have a link to the full article, but the upshot is that everything has now been proven to be fine, and we can expect a smooth ride from here as the recovery is well underway.
At least it’s [mildly] refreshing to note that the U.S. MSM are not the only ones completely distorting the facts in favor of the rose-colored glasses conclusion.

So rest assured everyone… The bottom is in, everything is fine, and the facts are apparently not relevant. Rush back in to your buy and hold positions…



What’s really interesting to me are the comments that erupted under the NYT article that I dissected above.  Frankly, it surprises me that the NYT would allow such comments to be posted and I suspect they will be pulled soon enough.
Here’s a few:

What in the world is with all this propaganda from the Times lately? ALL of the major economic indicators show that the recession continues to be severe. The fact that the banks need an ADDITIONAL 75 billion dollars underscores this point. Stop putting such a lame spin on it. Our economy is in really bad shape. Period.

— Jake Culligan, Philadelphia, PA

The stress test tested 5 mph bumper damage. It didn't test 60, 70 or 80 mph collisions.

The crew of the ship spent the past weeks painting huge murals of tropical sun filled beaches in front of the deadly icebergs to reassure the passengers that all is reasonably well and there’s no cause for panic.

— Former Financial Executive, NYC

I guess I can ultimately accept, because of my powerlessness, the monstrous frauds and travesties inflicted upon us by Wall Street, enabled by the government and facilitated by a sniveling press. What really bugs me is that you all think we're so stupid that we believe the stories you tell us. Is such insult necessary on top of the fait accompli of the injury? This stress test is a huge joke. Why do we have to pretend otherwise?

— krnewman, rural MI

Having changed the accouting rules so that the looters could cook the books nobody in their right mind can lend the slightest credence to these so called stress tests.

One would need to be certifiably insane to be mad enough to believe anything that emanates from either the looters hacks in Washington or the looters themselves.

— Mike Strike, Boston

I do not trust a single thing these men say. They are not independent of the institutions that they are "testing". I had hoped that Mr. Obama would bring truth and transparency to DC but it is very obvious that this is never going to happen.

— Mike, Riverhead, New York

The stress test was an elaborate Madoff scheme by the government to elevate banks shares so that the banks can sell you their overvalued stock as they dilute your value.

Congrats to the Obama team for such excellent flim-flam… now, I’m selling all my stocks tomorrow before the dump.

— Matt Miller, Grand Rapids

 Oh my!

It would seem that more and more people are not "buying it."  This means that confidence has been lost.  I think Geithner and Bernanke should consult a marriage counselor about what it takes to restore trust once it’s lost…they’ll find out that additional lies and deceit are not on the recommended healing list.

Ron Paul says "stress tests nothing but pure propaganda"

Two things…
1.)   We have a clear path of a nonfunctional decision-making system.  Analysis and history clearly indicates this is not  diagnosing…nor addressing the problem.  The cancer grows…outlook for the patient without treatment?

2.)   What will be the average person’s view of our system and the media within a few years? We haven’t seen anything yet.

Change…will happen!   But…it won’t be the Obama "Change We Can Believe In"



Thanks as always for your work on what I believe to be the only source of real news these days - on the economic side.  I receive great value for your site.  That being said, I understand the need for income sources.  But of all the advertisements that could be put on this site, I absolutely despise those looped video ads that have nothing to do with what is being advertised.  I can’t even read the first page worth of material because of that video playing right next to it.  Maybe I’m ADD or something, but those ads drive me absolutely nuts!  I’m not sure the money is worth what it does to the site.  

Those quotes are very powerful, Chris. Sometimes I really do wonder just how much the American public understands about all of this. While most people don’t seem to really get all the nuts and bolts, it’s rapidly becoming common knowledge that the government inflates statistics and massages data. People are gradually getting more skeptical of all the "offical" data that is churned out. I’ve often wondered how aware the rest of the world is of the data manipulations and overly rosy "news" propaganda that is produced daily by our government and corporate media machine. I don’t think the rest of the world is flat out stupid, but at the same time, I would have thought that Treasuries would be toast by now…oh wait, they’re getting that way…4.35% on the 30 year now, despite a recently sputtering equities market.

In case you’re not aware, there are no ads whatsoever for us enrolled members.

Face it: Chris is providing you with incredible value for FREE. The fact that he needs to PARTIALLY defray his cost of operating the site through advertising is hardly something that seems fair to complain about when you are getting a free ride. All you need do is sign up (and pay your way) as an enrolled member, and you’ll never see another ad on this site again.

Also, FWIW, I am finding to an ever-increasing degree that the benefits of enrolled membership considerably exceed what’s advertised on the home page. For example, Chris just started a keeping something of a diary of his day-to-day thinking on markets and the economy; the stuff that eventually gels together into Martenson reports, but delivered in real time as it occurs to him. The format is a new regularly updated thread in the Subscriber (enrolled member) only forum, and it’s been a huge hit so far. (It’s only a few days old, but it’s been very popular).

What I’m really saying is that there is a heck of a lot more to this site than what you get from the free version. Why don’t you at least ante up a few bucks to try enrolled membership for a month, read all the Martenson reports, enjoy the ad-free version of the site, and then decide whether it’s worth it for you to sign up for a full year’s membership. But regardless of whether you choose to follow that advice, I hope you’ll consider that complaining that you have to see ads on a site that delivers more content for free than most paid financial sites deliver at all simply isn’t reasonable or appropriate. Not in my humble opinion, anyway.



I didn’t even know there were banner ads on the free version.  All I can say is that membership to this site is worth one hell of a lot more than what Chris charges for it.  I pay $100’s more for subscriptions to Financial Times, the Economist and others.  No other place has the analysis Chris provides or the interaction with very smart members.  If you can’t afford $20 a month, then you have even more reason to join.

So love that.  If I were to go into politics I would want to be in the british system.  At worst you get to boo at things you don’t like to hear, at best you get to be really really upfront about it.  Awesome.

In the past I’ve enjoyed watching (on CSPAN?) the British parliamentary "Q&A" sessions – regular parliamentary meetings wherein the Prime Minister is required to show up and handle questions from any/all comers.  Real-time verbal fisticuffs.  Tony Blair (for all his other faults) was really quite good at it.  

Can you imagine such a thing in the US?

Viva – Sager

I would speculate that the stress test results will lead to a stock market rally, stronger bond prices, and falling gold prices. This has been a fairly reliable pattern after economic news is released, especially if the news is big enough and politically charged. The stress tests meet these criteria in spades.
So far in the early going this prediction is 100% spot on.  It's not really a prediction, actually, it is more of an observation from watching many, many "big news" items come out in the past.

Wall Street, the government and the press each do their part to assure that the markets send the right message and they rarely fail.  For this reason, my eyes glaze over whenever anybody tries to sell me on the "efficient market" hypothesis. "Markets" that behave in predictable ways to political news are not random and are not efficient. 

At least here in Sweden people know. On the biggest financial newspaper (, there has been hubdreds of comments, all pointing out (or joking about) what a nonsense those stress tests are. My guess is that the people lost their trust in your goverment after the lies used to invade Iraq (and possibly Afghanistan). Having Paulson handing out billions to his old company probably didn’t stir any further confidence in your financial sector…


Mish makes a great point.

Since Bernanke is willing to brag “The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario.”, I say prove it by canceling the fraudulent Public Private Investment Plan (PPIP) taxpayer ripoff.

Just tonight I had a buddy walk up to me and say "I sure wouldn’t have wanted to miss this rally in the market these past few weeks", knowing full well that I hold precious metals, am shorting treasuries, and hold an oil fund. for the sake of friendship i gave him a soft answer "this is a suckers rally, the trap is being set".
in this past two weeks i’ve seen silver shoot up from 11.90 to 13.90, the 30 year treasuries are moving, and oil is pushing $60 a barrel. these are telling figures because the markets are scared shitless of inflation in the face of a recovery. bernanke will not be able to balance the world economy on the head of a pin when the time comes, how will he know? does he need to reverse course right now? in six months and two days?

this is the problem with the centralization of power, we must rely on the ability of one agency (the fed) to make the right decisions and enact the right policies… but people make mistakes, they have bias’s, they fail to realize the vastness of a problem… or worse… that something they thought was vital was actually insignificant. we only know in retrospect.

the date with disaster may not be until 2012 when the majority of babyboomers start retiring and the true "stress test" begins. until then, i’ll take my lumps at dinner parties when it comes to investing.



 [quote]this is the problem with the centralization of power, we must rely on the ability of one agency (the fed) to make the right decisions and enact the right policies… but people make mistakes, they have bias’s, they fail to realize the vastness of a problem… or worse… that something they thought was vital was actually insignificant. we only know in retrospect.[/quote]
I "feel your pain", but I do not believe this is about the Fed or any other agency or person being able to make the right call at the right time.  What we are experiencing is the systematic unwinding of a bubble that was created by intervention in the marketplace to begin with.  Bernanke and Obama can try to blow that bubble back up, or keep it from further deflating through more intervention, but that will ultimately be as hopeless as the expectation for the original bubble to expand endlessly.  

The original bubble came in contact with the proverbial tack on the wall, which popped it.  It now has a hole in it.  Blowing back into the bubble may slow its collapse, but the hole is still there, and the bubble must fully deflate.

You may want to take a piece of chewing gum out at your next dinner party to provide a visual representation of all this.  I’m sure your dinner hosts/guests will love it.  ;)