Robert Stein 1924-2014

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Tuesday, May 05, 2009

The Bank Stress Test Hustle

The process may tell us as much as the results, which are finally due later this week after many false starts.

The delays themselves indicate the government is negotiating stress-test grades with the recipients, and now a series of leaks has economists worried about the manipulation that is going on. What kind of truth will we see in this hall of mirrors?

Two headlines in the Wall Street Journal today encapsulate the doubts and fears: "More Banks Will Need Capital" and "We Can't Subsidize Banks Forever."

The latter proposes that banks be forced to sell all toxic assets, rather than cherry-pick them for cosmetic purposes, and that the government take tighter control in return for bailouts:

"(T)he government should stop providing capital, loan guarantees and financing with no strings attached. Banks should understand this. When providing loans to troubled companies, they place numerous restrictions, called covenants, on what these firms can do. These covenants generally restrict the use of assets, risk-taking behavior, and future indebtedness. It would be much better if the government focused on this rather than on its headline obsession with bonuses."

Meanwhile, as they always do, banks are paying off their shareholders while starving depositors with close-to-zero rates on their money.

A new study shows that "banks only marginally reduced dividends in the first 15 months of the crisis, paying out a staggering $400 billion in 2007 and 2008. While many banks have been reducing their dividends more recently, bank bailout money had been literally going in one door and out the other."

Among the big banks that will be at the government trough again after test results are announced will be Wells Fargo, partly owned by Warren Buffett, who at his stockholder meeting last week touted its strength and wished that he were legally allowed to own more of it.

Maybe the government should find a way to let that happen. Better him than us.

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