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The Big Lie: Stress Test Optimism Just Wall St. Propaganda, Former Bank Regulator Says
Posted May 08, 2009 12:12pm EDT by Aaron Task in Newsmakers, Recession, BankingDon't you believe it, says William Black, an Associate Professor of Economics and Law at the University of Missouri - Kansas City.
"It's in the interest of the financial community to send this propaganda out," Black says. "It's remarkable not that they do it but that it still works."
In other words, this isn't the first time we've been told "the crisis is over" and that "banks are well capitalized" - and probably won't be the last.
The professor and former financial regulator foresees another wave of foreclosures and future bank losses of more than $2.5 trillion vs. the government's $599 billion estimate.
Simply put, the stress tests weren't strong enough to be considered "wimpy," Black says. Furthermore, Fannie Mae, Freddie Mac, AIG and IndyMac were deemed to have "passed" much more stringent government stress tests before their respective failures, he notes, recalling the grim history:
- Fannie and Freddie: In July 2008, Treasury Secretary Paulson testified that Fannie and Freddie were "adequately capitalized" under the test. In August 2008: "even in [Freddie's] most severe stress tests, [show] losses ... less than $5 billion." Actual losses: 20 to 40 times greater.
- AIG: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those [CDS] transactions." AIG claimed in 2008 "Using a severe stress test ... losses could go as high as $900 million." Actual losses: 200 times greater.
- IndyMac: Sold over $200 billion of "liar's loans." Actual losses: 160 times greater than its tests.
- Rating Agencies: Their stress tests gave AAA ratings to toxic waste. Actual losses: more than an order of magnitude greater.
"The examinations and stress tests are shams -- always precise, always farblondget," Black claims.
So while others are celebrating the end of the crisis, ask yourself this: If the government sees up to $599 billion in additional bank losses, why are they requiring banks "only" raise $75 billion? That suggests the government thinks the banking sector is overcapitalized by $525 billion.
"Once people learn they're being lied to, they react very badly," Black says. "And of course this is not the first lie."
Maybe you really can fool some of the people all of the time.
225 Comments
Yahoo! Finance User - Friday May 08, 2009 12:22PM EDT
Private nuclear initiatives will be the next bubble. I'm working on mine to wipe the rating agencies off the face of the map.
franck s - Friday May 08, 2009 12:23PM EDT
Stop casting dispersions on our stress tests!!!
OfficialCraigslistKiller - Friday May 08, 2009 12:24PM EDT
Sell on good news. Keep that propaganda coming. I'll dump all my REITs
Yahoo! Finance User - Friday May 08, 2009 12:26PM EDT
We all know this so called stress test was a sham.You just got to know what to buy,when to buy it & when to sell.Just a money game.Economy is in bad shape & will be for a while.
martin - Friday May 08, 2009 12:26PM EDT
Pobably theses statements contain a lot of truth!
Yahoo! Finance User - Friday May 08, 2009 12:27PM EDT
This administration can not be trusted especially with all the tax cheat appointees! Chase just cut credit lines to small business - more unemployment, not to mention GM dealerships that will be closing and floor plan loans to finance vehicles that will not be sold and therefore not paid back to the banks. This crises is not over by a long shot - just kool-aid to keep the sheep at bay.
Yahoo! Finance User - Friday May 08, 2009 12:28PM EDT
All you lil' bulls better be out buying today. Barry's got your back.
franck s - Friday May 08, 2009 12:29PM EDT
Stop with the pessimism.The stress tests worked. It will help us deal with the toxic assets and fertilize the green shoots.
Kristina - Friday May 08, 2009 12:30PM EDT
the market will run to 9500 and contract to 7000. take the ride up, and get your profit out. only way to win this is take your profit at 9500, switch to low risk-no risk or short.
Yahoo! Finance User - Friday May 08, 2009 12:31PM EDT
heckle and jeckle are in shock that the bamster obama is lying with timmy... oh not.. not the messiah's programs?... it can't be ... barry said it will all be better now... hope and change... you voted for it loons
shags1_23 - Friday May 08, 2009 12:32PM EDT
Um, duh! I already had a clue about all of this. Don't listen to people who have an agenda; it's usually for their own benefit, not yours. Actually, do listen to them, but listen with a very large grain of salt.
Yahoo! Finance User - Friday May 08, 2009 12:34PM EDT
So the NY Fed Reserve / Goldman alumnus is now leaving, following in Geithner's footsteps because he's made back most of his losses probably. Nothing but crooks in the entire super rigged system.
Yahoo! Finance User - Friday May 08, 2009 12:35PM EDT
Great job as always TechTicker guys. When everyone else is lying to us, good to know a mainstream outfit is out there looking for the truth. If the WH Press Corps starts including financial journalists, well... no, they probably wouldn't pick you. Too good. Too honest. They know you'd spoil their game.
Yahoo! Finance User - Friday May 08, 2009 12:37PM EDT
Obama at his best - create a new perception, create a new reality. Smoke and mirrors.
Yahoo! Finance User - Friday May 08, 2009 12:37PM EDT
Only a fool with greed in his eye would believe the government and its lies. We must stop them cold in their tracks. i had said over a year ago take the power away from them. This is the only way we will get the change we truly need. Empty all accounts and sit on your money do not let them have so much as a dime. Shut em down! They will never need to fix this mess if they can still play with OUR money.
franck s - Friday May 08, 2009 12:39PM EDT
This guy is pretty cool. He's been in the mix, but isn't part of the clan. He even gives you the number; if you take the AIG stress test estimate, and the real number you get: 900 million is to 200 billion as 75 billion is to ? Answer is 18 trillion, which is probably the capital necessary to right the banks which underwent the stress tests. I hope for his sake Mr. Black doesn't have political aspirations. I don't think he would last long.
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Yahoo! Finance User - Friday May 08, 2009 12:19PM EDT
Propaganda and smoke screen.