[Corp. Watch] Government allows Big Greed to cheat on stress tests

[Corporation Watch]

Flunking the Stress Tests

  By Nomi Prins

(Mother Jones, May 8) -- After weeks of suspense, the Federal Reserve  
revealed the results of its bank stress tests Thursday -- as if they  
actually meant something.

	The Fed claimed to have conducted a rigorous investigation of the  
nation's 19 biggest banks to determine which ones would need more  
capital in the event of further economic woes, like a spike in  
unemployment, or a dip in home prices or gross domestic product.

	And according to Fed Chairman Ben Bernanke, we should take  
"considerable comfort" in the results. But don't be fooled by the  
drama: All the stress tests did is hand the banks a free pass for  
further federal aid.

	The tests were a meaningless exercise in numerous ways. For starters,  
the results were predictable -- the 10 banks that need more capital  
are obviously still struggling.

	Nor is there a big mystery about how much capital they require: There  
are rules that determine the amount of money banks should set aside to  
cover their risks, and had those rules been enforced, the institutions  
wouldn't now be dependent on the public dime.

	What makes the hype over the stress tests so galling is that the Fed  
should have been doing this kind of monitoring all along.

	But the most farcical thing about the process is that after more than  
two months of intrigue and secrecy and tactical leaks, we still don't  
have an accurate picture of the weaknesses of the financial system.

	In fact, the banks were allowed to participate in the design of the  
tests -- for instance, by naming the price of the securities that they  
can't get rid of. And now the government is using the bogus results as  
a rubber stamp for the flawed policy it has pursued since the crisis  
started.

	Before the stress tests, the failing banks received trillions of bail- 
out dollars through various federal channels. Now we have tests to  
confirm that we should keep doing the same thing.

	Bernanke said as much to Congress on Tuesday: "Bank[s] ... will be  
required to develop comprehensive capital plans for establishing the  
required buffers … with the assurance that equity capital from the  
Treasury under the Capital Assistance Program will be available as  
needed."

	Translation: Banks get to choose how they will find more capital. And  
if they fail to raise enough funds, the government will keep dumping  
money into mismanaged firms, in the hope that it will one day trickle  
down to the little people.

	The banks that came up short in the stress-test sweepstakes have seen  
the biggest drops in their stock prices -- and thus lost the most  
taxpayer money -- since they got their first Troubled Asset Relief  
Program (TRAP) injections last October.

	(This list includes Citigroup, Bank of America, Wells Fargo, PNC  
Financial Services Group, SunTrust Banks, Fifth Third Bancorp, and  
Regions Financial Corp.)

	But if the TARP infusions, plus the trillions in cheap loans provided  
by the Fed, haven't worked, another round of new capital probably  
won't either.

	And despite Treasury Secretary Tim Geithner's declaration that the  
results are "reassuring," the banks are likely in worse shape than the  
tests suggest. Just because a bank avoided the capital penalty box  
doesn't mean it's healthy.

	Some, like Goldman Sachs, are investment banks that converted  
themselves into bank holding companies last Fall in order to get  
access to federal money, and received a two-year grace period to  
standardize their books with other banks.

	And some happen to enjoy a symbiotic relationship with the Fed, like  
JPMorgan Chase, whose last two takeovers -- of Bear Stearns and  
Washington Mutual -- were government-funded.

	JPMorgan Chase's stock was one of the biggest losers after TARP  
began, yet its tests indicated that it has somehow taken care of its  
capital needs just fine.

	And those are banks that supposedly "passed" their stress tests. The  
banks that were ordered by the Fed to come up with more capital may  
also be shakier than Geithner would have us believe.

	The two biggest problem banks, Citigroup and Bank of America, spent  
last week frantically trying to persuade the Fed that they don't need  
extra capital, although they both posted significantly increased loan  
losses in their most recent quarterly results.

	"We absolutely don't think we need additional capital," Bank of  
America's CEO Ken Lewis insisted. But according to the government, his  
bank needs another $33.9 billion.

	The glaring mismatch between the banks' rosy public statements and  
the Fed's (gentle) testing suggests a troubling reluctance on both  
sides to face hard facts about the real condition of the banking system.

	Too many numbers are open to interpretation and debate, which usually  
means that things are worse than they seem. It's time for the truth  
from the Fed, the Treasury, and the White House.

	We need a different approach that provides capital directly to  
consumer in the form of loans, in order to loosen up credit, provide  
relief for struggling citizens, and stabilize failing banks.

	Instead, the government's solution is merely to do more of the same.  
Which means that before very long, the same banks will be lining up at  
the public till, asking for more of our money.