Posted on 04/24/2009 5:23:32 PM PDT by Grim
Grab yourself a bowl, kids! WTF!
The Federal Reserve Board of Governors, as promised, has released a white paper enlightening the common peasants to the Fed methodology of stress tests - thank goodness because otherwise the idiots down here at Ground Zero might have no idea what the hell is going on and God forbid the Fed allow that to happen!
Skeeze on over to the Board's website and take a look for yourself if you have no life, actually believe what these bastards have to say, or find yourself laid off with too much time on your hands and want a good laugh.
Let's analyze this announcement for a moment, shall we? You're here for a reason - you don't want to analyze this bullshit on your own, do you? - so let me pull out my central banker decoder ring and make some sense of this farce.
Firstly, I point out that even if the "tests" were constructed using sane accounting rules (as opposed to the Fed's "WTF method of accounting" which we shall address shortly), the scenarios are all wrong. The Fed, Treasury, FDIC, and OCC are all terribly misinformed or deliberately testing unlikely scenarios in order to make the results better than they should be. Unemployment is raging harder than any of these agencies want to admit (or want you to know, as if you wouldn't notice) so testing rosy little prospects doesn't show anything worth value.
That being said, the tests themselves are, as I said, performed using some mutated hybrid of sound accounting rules. It is not governmental accounting (and why would it be for our friends at the quasi-private Fed?), nor is it GAAP, nor is it IFRS, nor is it anything but a convenient amalgam of accounting. A little bit of accural here, some capital losses here and viola! What do you get? A report that says the top 19 banks are totally well-capitalized. Crisis over. You can go back to watching American Idol now.
Not.
Who had the Treasury crawling all over their books? Citigroup Inc (C), JPMorgan Chase & Co (JPM), Wells Fargo & Co (WFC), Bank of America Corp (BAC), Goldman Sachs Group (GS), Morgan Stanley (MS), MetLife (MET), PNC Financial Services Group (PNC), US Bancorp (USB), Bank of NY Mellon Corp (BK), SunTrust Banks Inc (STI), State Street Corp (STT), Capital One Financial Corp (COF), BB&T Corp (BBT), Regions Financial Corp (RF), American Express Co (AXP), Fifth Third Bancorp (FITB), Keycorp (KEY) and GMAC LLC (GKM) - of the 19 banks poked at by these clowns, all are expected to come out clean except for Regions. Sure.
"These 19 firms collectively hold two‐thirds of the assets and more than one‐half of the loans in the U.S. banking system, and support a very significant portion of the credit intermediation done by the banking sector," says the report. The report does not mention the $200 trillion in derivatives exposure attributed to $WFC, $BAC, $JPM, $GS, and $C. Of course not.
Key points of the WTF accounting method (maybe the AICPA Board of Examiners should add a 5th category to the CPA exam? FAR, AUD, BEC, REG, and WTF?):
- For securities held in the available‐for‐sale and held‐to‐maturity portfolios, institutions were instructed to estimate possible impairment relative to net unrealized losses at year‐end 2008
- Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate
- Although the likelihood that unemployment could average 10.3 percent in 2010 is now higher than had been anticipated when the scenarios were specified, that outcome still exceeds a more recent consensus projection by professional forecasters for an average unemployment rate of 9.3 percent in 2010.
"professional forecasters" LMAO. You mean analysts? Really?
Now here comes the boring accounting shit and to my non-TT BPO 75 or 90-inclined readers, I apologize in advance for this. Trust me, I'm going somewhere with this.
The SCAP [Supervisory Capital Assessment Program - more fucking acronyms] was designed under the assumption that the institutions continue to operate under the regulatory and accounting frameworks existing as of December 31, 2008 and considering the effect of significant changes that have or are expected to occur during the next two years.2 Loans held in portfolio subject to accrual accounting are carried at amortized cost, net of an allowance for loan losses. The use of accrual accounting for these assets is based on BHCs’ intent and ability to hold these loans to maturity, which reflects, in part, a combination of more stable deposit funding and information advantages about the quality of the loans they underwrite. The economic value of loans in the accrual book is reduced through the loan loss reserving process when repayment becomes doubtful, but is not reduced for fluctuations in market prices, which may be driven by market liquidity considerations, if those factors do not affect the ultimate likelihood of repayment. The adherence of SCAP to current practices is important because the majority of assets at most of the BHCs participating in the SCAP are loans that are booked on an accrual basis. As a result of the loss recognition framework for assets in the accrual loan book, the results of this exercise are not comparable with those that would evaluate such assets on a mark‐to‐market basis.
Hang on a second and slow down there, killer. Run that one by me one more time.
The tests were "designed under the assumption that the institutions continue to operate under the regulatory and accounting frameworks existing as of December 31, 2008" according to the opening paragraph. But it wraps up with "the results of this exercise are not comparable with those that would evaluate such assets on a mark‐to‐market basis," despite the fact that mark-to-market was the rule of the day as of December 31st, 2008?
Well that right there tells you why these tests are fucking moronic. You don't have to understand, care about, or know a single thing about mark-to-market accounting to see the problem with that statement, right?
Why would you test bank balance sheets knowing the radioactive waste of some $200 gazillion in derivatives and other such creative financial unicorns actually lie outside of these banks' balance sheets? Meh.
So you see, kids, the Federal Reserve is full of shit. As is the FDIC, the OCC, and our own Treasury Department. It's such blatant bullshit that one cannot help but scratch one's head wondering what exactly they meant to accomplish by this little stunt. I know I for one am stumped.
Using these mutant accounting methods and throwing around creative acronyms like old ladies throwing around panties at a Tom Jones concert will not fix the issue at the heart of this crisis. It's sad to admit but I actually hope that these agencies are intentionally deceiving us but at the very least have a clandestine understanding of the depth of the problem amongst themselves. Lie to me all you want, my little Fed friends, just please don't lie to yourselves.
There you go, kids. The banks may not be properly capitalized but at least we know one thing: these guys are full of sh^t.
While fairly accurate (I guess) and a bit funny this contains language not appropriate for the forum. Too many F-bombs, dude. I’m IBTZ
You mean they are telling how many ways we are getting screwed?
Well, it’s what people have been saying we should expect. The rules have been written so everyone gets a pass. No surprise here.
What the markets will make of this next Monday is anybody’s guess.
"He says to it, "You must give me work, and, more than that, lucrative work. I have foolishly fixed upon a trade by which I lose ten per cent. If you impose a tax of twenty francs upon my countrymen, and give it to me, I shall be a gainer instead of a loser. Now, profit is my right; you owe it me." Now, any society which would listen to this sophist, burden itself with taxes to satisfy him, and not perceive that the loss to which any trade is exposed is no less a loss when others are forced to make up for it, such a society, I say, would deserve the burden inflicted upon it." - Frederic Bastiat - "That Which is Seen, and That Which is Not Seen"
No wonder the Vunderkint Geithner was the only one who knew how to handle this.
Which is why Geithner's carefully worded statement the other day, "the overwhelming majority of banks in the U.S. are well capitalized", is not technically a lie.
A little less profanity and he could challenge The Mogambo Guru for the title of “the angriest man in economics”.
Well, at least the last word had a ^ in it. You actually have to READ THE ARTICLE in order to see all the unedited words.
Excellent Article. Appreciated it.
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