How Banks Cut Stress Test Cap Requirements in Half

We have noted on repeated occasion that the Stress tests were: a) not very stressful; and b) relied on metrics that were rather generous. Odd, in my opinion, to show such largesse to those very same reckless banks that caused the entire financial mess.

In particular, the 25-to-1 leverage is absurd, as is the worst case scenario of 9.5% unemployment — a number that is mere pissing distance from the current 8.9%.

Far be it from me to call the Stress tests a charade, a dupe, a con game or an exercise in manipulation. For that, I’ll leave it to others.

Like the Wall Street Journal, who noted this morning that the banks managed to browbeat the Fed into accepting much lower Capital needs than the tests should have required:

“The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation’s biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.

In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits. . .

The Fed ultimately accepted some of the banks’ pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter.”

Just how much were the actual required amounts haggled down? According to the WSJ, alot:

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Bank Original Stress Test Capital Requirement “Re-Negotiated” Amount
Bank of America’s $50 billion $33.9 billion
Wells Fargo $17.3 billion $13.7 billion
Fifth Third Bancorp $2.6 billion $1.1 billion
Citigroup $35 billion $5.5 billion

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That is a decrease in require capital of about half (48.33%). The Journal implied these four negotiated test results were typical of the 19 banks.

stress_ns_20090508One last note: The Stress Tests were done using “Tier 1 common capital” as a yardstick. We can assume that was also pushed by the banks, rather than the expected metric “tangible common equity.” That measure would have required another $68 billion in capital.

The entire exercise is turning out to be one giant joke — and the laugh is on the taxpayers . . .

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Previously:
Stress Test: Not Very Stressful (April 24th, 2009)
http://www.ritholtz.com/blog/2009/04/stress-test-white-paper/

Stress Test: 25-to-1 Leverage as a Healthy Bank Target? (May 8th, 2009)
http://www.ritholtz.com/blog/2009/05/stress-test-25-to-1-leverage/

Source:
Banks Won Concessions on Tests
Fed Cut Billions Off Some Initial Capital-Shortfall Estimates; Tempers Flare at Wells
DAVID ENRICH, DAN FITZPATRICK and MARSHALL ECKBLAD
WSJ, May 9, 2009
http://online.wsj.com/article/SB124182311010302297.html

Stress Tested: Has Geithner’s Bank Confidence Game Worked?
MASSIMO CALABRESI
Time, Fri May 8, 1:10 pm ET
http://www.time.com/time/politics/article/0,8599,1896825,00.html

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