Government Regulators Subject 19 Banks to ‘Mild Discomfort' Tests

By
Real Estate Agent with Inactive

The assumptions for the baseline scenario and the adverse scenario used to develop the so-called ‘Stress Tests' are overly optimistic and fall far short of any 'worst case' scenario to the point that some may charge that they are more like a ‘Best Case' scenario and a ‘Mild Discomfort' scenario.

The baseline scenario assumes:

  • Gross Domestic Product (GDP) falling 2 percent this year,
  • Unemployment rising to 8.4%, and
  • Home prices dropping another 14%.

The adverse scenario assumes:

  • GDP falling 3.3 percent,
  • Unemployment rising to 8.9%, and
  • Home prices dropping another 22%

With the exception of Citi Bank (apparently it receives special treatment) If a bank fails to pass the so-called 'Stress Test' the regulators give them 6 months to secure private financing before they can gain access to the next tranche of bailout funds.

Compare the GDP assumptions to the GDP data for 2008:

  • For the calendar year 2008 GDP rose 1.3 percent,
  • In the fourth quarter of 2008, GDP fell 3.8 percent, the biggest contraction since 1982.

How did they determine that a projected 3.3% decline in GDP was sufficient for their so-called 'Stress Test?' 

Compare the unemployment assumptions to the unemployment rate for January 2009 when it surged to 7.6 percent, the highest in more than 16 years. If you average the unemployment numbers given by reputable economic forecasters it amounts to slightly less than 9%. It would seem more appropriate to use 8.9% unemployment for the baseline scenario. 

With declining GDP, rising unemployment, and yet another wave of foreclosures ready to drive housing prices to new lows we could easily exceed their estimates for dropping home prices if their foreclosure/refinancing programs aren't wildly successful within the 6 month time frame that they have provided to banks to secure private financing.

With this data and your current sense of the impact of the credit crisis on lenders, businesses, and consumers; and the depressed levels of consumer confidence and investor confidence do you think that these scenarios are adequate to address the ‘worst case' scenario? I certainly don't and I don't think that they will do anything to restore investor confidence in the banks. It seems to me that they are trying to by time and that they are apparently ‘kicking the can' of responsible action by banking regulators down the road by 6 months. The outlook is dire indeed.

Posted by

George Bennett, Principal Broker, Affiliated, GRI in Port Orford, OR 97465

Affiliated with 'Neath The Wind Realty Inc.

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Ambassador
1,109,225
Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Realtor - Atlanta Real Estate

The long and the short of this are banks are stressed right now.  If it was not for the Government monies, forced shotgun weddings (mergers) many more would have already closed.  The real test in this economy lies ahead.  We have not yet seen the impact of the Alt-A loans which are much bigger than the sub-prime losses, the credit card failures and commercial real estate.  I don't think many will recognize the landscape this time next year. 

Feb 25, 2009 06:13 PM #1
Rainmaker
156,802
George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI

Hi Jim - It appears that you see the same economic storm front that I see. How do you interpret the actions of Secretary Geithner and the regulators?

Feb 25, 2009 07:40 PM #2
Ambassador
1,109,225
Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Realtor - Atlanta Real Estate

Personally I think they do not have a clue what they are doing, and neither does Wall Street. Everytime they speak down the economy Wall Stree slides further!  First of all they have no bedside manners, it is like a doctor telling a patient your going to die of cancer that the doctor caused! 

Feb 25, 2009 08:23 PM #3
Rainmaker
156,802
George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI

Jim - I would have to agree. They don't fully understand the problem. They don't have a plan. And to avoid accusations of doing nothing they are using a trial-and-error approach. They might get lucky and improve somethng or they might make matters worse. The uncertainty frightens bankers, investors, businessmen, consumers, and taxpayers.

Feb 25, 2009 10:46 PM #4
Rainmaker
156,802
George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI

Here is an update

Mark Zandi, chief economist of Moody’s Economy.com, now places the odds of "a mild depression" at 25 percent, up from 15 percent three months ago. In that view, the unemployment rate would reach 10.5 percent by the end of 2011 — up from 7.6 percent at the end of January — average home prices would fall 20 percent on top of the 27 percent they have plunged already, and losses in the financial system would more than triple, to $3.7 trillion.

Allen Sinai, chief global economist at the research firm Decision Economics, sees a 20 percent chance of "a depressionlike possibility," up from 15 percent a week ago.

"In the housing market, the financial system and the stock market, we’re already there," Mr. Sinai said. "It is a depression."

Mar 01, 2009 12:38 AM #5
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George Bennett

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