If "Stress Tests" Were Baseball, at Least Banks Would Be Hitting Over .300, Though in Obama's America There Is No Game of Failure

Matt Welch | April 29, 2009

From Bloomberg News:

At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said. [...]

Final results of the tests are due to be released next week. The banking agencies overseeing the reviews and the Treasury are still debating how much of the information to disclose.

Whole thing, including some moderately promising news, here; link via The Corner.

I am reminded of something Nick Gillespie and I mentioned in passing in this morning's 100-days column: When Obama said "it's not about helping banks–it's about helping people," it wasn't just that the contradictions were immediately apparent. If anything, the audible dissonance then was just a peep compared to the ongoing roar of reality. Which is to say, Obama' mindset is that Banks Must Not Fail, because they are inherently more important than the people from whom (with the help of the feds) they are currently siphoning money.

Consider Obama's mid-April economic address at Georgetown University, the speech that moved Joe Klein to such poeto-ecstatic heights. Here's what the president said then about the comparative importance of banks and people:

And although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of to banks -- one of my most frequent questions in the letters that I get from constituents is, "Where's my bailout?" -- and I understand the sentiment. It makes sense intuitively, and morally it makes sense, but the truth is that a dollar of capital in a bank can actually result in $8 or $10 of loans to families and businesses. So that's a multiplier effect that can ultimately lead to a faster pace of economic growth. That's why we have to fix the banks.

Those with a firmer grasp on multiplier effects are welcome to share your knowledge in the comments. I'll just observe that if Obama believes that's actually true, the only upward limit on his appetite for propping up banks will be maybe Congress, perhaps eventually the courts, but most importantly the one entity he referenced in the passage above: public opinion.

Comments

DADIODADDY|4.29.09 @ 12:13PM|#

Soooo...the source of capitol is the government via the banks...and the banks then leverage the governments money(cause it's obviously not ours anymore)to creat economic growth...WTF over.

|4.29.09 @ 12:14PM|#

if Obama believes that's actually true

I'm just gonna stop you right there, Matt, and recommend that this and any other thread involving that statement be relocated to the "Purely Theoretical" forum.

robc|4.29.09 @ 12:18PM|#

STANDARD LIBERTARIAN DISCLAIMER #1

Why the multiplier argument is silly:

If the bailout comes to me, and I, for example, use it to pay down credit card debt, the money goes to a bank (Chase, in this case), who can then, apparently, multiply it 8x or 10x. Thus, bailing me out directly gets all of the bank multiplier benefit, plus I benefit.

Regardless of what I do with the money (short of mattressing it), it will filter down to the banks to apply their magical multiplier.

High Every Body|4.29.09 @ 12:19PM|#

Why do these words sound so racist today but they did not in December?

Naga Sadow|4.29.09 @ 12:21PM|#

Wait. So Obama is suggesting that if he simply gave everyone a bailout we wouldn't spend it or put it in a . . . what do you call it again? Oh. That's right. A FUCKING BANK!!! FUCK!!!!!!!!!!!!

High Every Body|4.29.09 @ 12:23PM|#

Naga,

You owe me a bottled water and a keyboard cleaning :)

T|4.29.09 @ 12:24PM|#

So Obama is suggesting that if he simply gave everyone a bailout we wouldn't spend it or put it in a . . . what do you call it again? Oh. That's right. A FUCKING BANK!!!

No, dumbass. You're poor, so you'd fritter it away on inessentials like food, clothing, rent, smokes, lottery tickets, and beer. That doesn't grow the economy because things poor people buy don't come from the economy measured by GDP. They come from the economy measured in pixie dust and unicorn farts. Damn, Naga, don't you know anything about the economy? Poor people don't count!

High Every Body|4.29.09 @ 12:25PM|#

No, dumbass. You're poor, so you'd fritter it away on inessentials like food, clothing, rent, smokes, lottery tickets, and beer.

You left out Craigslist erotic services.

|4.29.09 @ 12:26PM|#

The banking agencies overseeing the reviews and the Treasury are still debating how much of the information to disclose.

Lemme guess, like everything else they're going to be as transparent as, I dunno...a brick?

Naga Sadow|4.29.09 @ 12:26PM|#

T,

You're right. As usual. Sad part is I'm an economics major. I should know this stuff.

Sean Healy|4.29.09 @ 12:27PM|#

It's not a multiplier effect. Obama seems to be talking about regulatory capital. Depending on the type of loan, a bank can lend about about $8-$12 for every $1 of capital. But that money still has to come from somewhere. The President obviously forgot that the banks, in addition to having a capital problem, have a liquidity problem. The old tools for fixing this (capital markets fundraising through MBS, CDOs and the rest of the structured finance alphabet soup) don't work like they used to. What the President WON'T say is that the only way out of this is through recapitalisation (with your money) followed by massive deleveraging. That means smaller balance sheets or, in other words, LESS lending. That money is not coming back to you in the form of new mortgages or car finance or a higher limit on your Mastercard. It's a blood transfusion.

Naga Sadow|4.29.09 @ 12:27PM|#

HEB, you clown. Why would I pay for internet porn. That's just crazy talk.

|4.29.09 @ 12:30PM|#

I am strongly of the opinion that these banks did not in fact fail (by the government's methodology) the stress test. What was becoming clear the last few weeks is that the financial sector is strengthening, generating profits and should be able to earn its way out of their capital short-falls (and banks today hold lots of excess capital by any standard measure).

But a couple things became apparent

- A bunch of banks had the ability and desire to immediately repay TARP funds (reducing government's ability to influence the sector)

- The changes in M2M rules decreased the need for participating in the PPIP (a large government effort)

- If everyone passes, then the assumption is that the test was a sham.

So the government needed some justification for stopping banks from repaying TARP and forcing them to participate in PPIP (note Sheila Bair's comments that regulators would "suggest" that banks participate).

An easy way to do this would be to "fail" a number of large banks. This would force them into asset sales they don't want, and give them political cover to keep everyone from repaying TARP.

The trick is not to fail them too badly. If you said CITI needs an extra $100 billion, that will scare the market badly. So you fail everyone from $1-10 billion. Amount they can raise, that won't dilute shareholders too badly, and will keep government a minority holder (but in reality holding much of the power).

But maybe I just took my conspiracy pills this morning

High Every Body|4.29.09 @ 12:31PM|#

Why would I pay for internet porn. That's just crazy talk.

I don't pay for that either, silly bear. I was talking about real live human outcall or incall action.

T|4.29.09 @ 12:34PM|#

HEB, you clown. Why would I pay for internet porn. That's just crazy talk.

This whole discussion should prove that craziness is abundant in the world today. Somebody is paying for internet porn, just like somebody has to think all this bailout crap is a good idea.

Maybe it's the same people...

Naga Sadow|4.29.09 @ 12:43PM|#

HEB! Great link!

Sean Healy|4.29.09 @ 12:45PM|#

What was becoming clear the last few weeks is that the financial sector is strengthening, generating profits and should be able to earn its way out of their capital short-falls

Nope. Temporary bump from unusually good fixed income numbers - inflated, ironically, due to capitalizing on the very (currency, bond) volatility caused by the banks in the first place! The banks are a wreck. The stress tests are too optimistic, unfortunately.

|4.29.09 @ 12:51PM|#

Again, those who aren't paying for porn: are you just getting amateur stuff, or are you hacking passwords or downloading illegal copies of professionally-made stuff?

If it's the first, keep in mind that some people are willing to pay for higher quality. Just because water is free doesn't mean people who pay for wine are idiots.

If the second, you're a cheater and a thief who leeches off those of us honest masturbators...and you have no place on a site that purports to respect private property.

Either way, I don't get the attitude towards those of us who cum by our porn honestly.

High Every Body|4.29.09 @ 12:53PM|#

Again, those who aren't paying for porn: are you just getting amateur stuff, or are you hacking passwords or downloading illegal copies of professionally-made stuff?

The free tour pages, google and youtube searches for what they put out there free are fine with me.

|4.29.09 @ 12:57PM|#

The banking agencies overseeing the reviews and the Treasury are still debating how much of the information to disclose.

Is it securities fraud to refuse to release the entire results of the stress test? Those results are material, right? If the company ran such tests internally, I can't believe they wouldn't be required to disclose them in their entirety.

Sean, its my understanding that most banks (with notable exceptions, consisting of banks who torched their balance sheets with derivatives and should, therefor, die) don't have a capital or a liquidity problem. The relative lack of lending right now has mostly to do with only being willing to lend to, umm, creditworthy borrowers.

|4.29.09 @ 12:59PM|#

"Nope. Temporary bump from unusually good fixed income numbers - inflated, ironically, due to capitalizing on the very (currency, bond) volatility caused by the banks in the first place! The banks are a wreck. The stress tests are too optimistic, unfortunately."

Fixed income trading helped, but when I was taught to analyze bank earnings statements, the main points to always consider (and NI was typically far down the list).

- The size and sustainability of Pre-Tax Pre Provision income

- The reasonability of credit provisioning

- The Net Interest margin

- Growth of deposits

In my view all of these are positive (I think the aggressive credit provisioning, leading to apparent lower NI is a big positive). Clearly some 1-time fixed income trading gains were in there. But for the big banks, given the huge market volatility, I think trading should be robust for the foreseeable future.

Paul|4.29.09 @ 1:05PM|#

Yesterday NPR reported that the Obama administration is "concerned" that some of the banks are showing better than expected profits, meaning that their new "regulatory regime" may lose steam as the sense of urgency evaporates. So they need to act more quickly.

*pause for irony*

Then they went on to describe Geithner's new plan for regulating the markets. Previously, companies like AIG did so many things (according to Geithner) that no single regulatory agency knew what part of their business to oversee. (Some people disagree with that notion-- but that must be reserved for another segment next week).

Anyhoo, Geithner's new grand vision is to have a single regulatory body which oversees everything and everyone in the bidness, regardless of their specific role or niche, then when any sign of a company becomes unstable, the government will swoop in (one conjures images of Errol Flynn) to support and stabilize said company.

*pause for irony*

So, we'll have a brave new market where prices will never go down, companies will never fail, go out of business or have losing strategies. Because that's a market failure.

Excuse me while my head assplodes.

|4.29.09 @ 1:09PM|#

If the second, you're a cheater and a thief who leeches off those of us honest masturbators

A disturbing new twist on the term "free rider."

(Ow, don't twist for reals.)

GG|4.29.09 @ 1:10PM|#

The Stress Test Cliff Notes

Conclusion: "An online dating questionnaire is more probing."

Janet Tavakoli for Sec. of the Treasury!

Ms Tavakoli took on such topics as Tim Geithner's cozy relationship with beneficiaries of the bailout, Hank Paulson's role as an interested man, Robert Rubin as an interested man, financial meth labs, incompetence at the SEC, backdoor bailouts, and more.

|4.29.09 @ 1:14PM|#

The free tour pages, google and youtube searches for what they put out there free are fine with me.

OK, so we're really talking about different grades of porn. You should be happy you are able to consume the excess that trickles down from masturbators with more expensive tastes.

Paul|4.29.09 @ 1:17PM|#

consume the excess that trickles down from masturbators with more expensive tastes.

Gross

Fair and Ballast|4.29.09 @ 1:18PM|#

"The free tour pages, google and youtube searches for what they put out there free are fine with me."

I'm with HEB:

www.youngleafs.com

www.pichunter.com

Meta Regulator|4.29.09 @ 1:22PM|#

"Anyhoo, Geithner's new grand vision is to have a single regulatory body which oversees everything and everyone in the bidness, regardless of their specific role or niche, then when any sign of a company becomes unstable, the government will swoop in (one conjures images of Errol Flynn) to support and stabilize said company."

FanFuckinTastic!

Trickle Down Pornomics|4.29.09 @ 1:23PM|#

www.isharemybitch.com

www.goodbyemydarling.com

Sir Mix-a-Lot|4.29.09 @ 1:26PM|#

Again, those who aren't paying for porn: are you just getting amateur stuff, or are you hacking passwords or downloading illegal copies of professionally-made stuff?

Yo, whether it is a skinny amateur girl from the Ukraine with three pimples on her tail bone extensions or this months Photoshopped skank Hef is throwin' out there, booty is booty, and pussy is pussy. You haven't figured that yet, you gettin' yo ass robbed.

High Every Body|4.29.09 @ 1:30PM|#

For you "Copyright wants to be Free" people, setup an online profile as a young woman and say that you are into whatever pr0n you are into and watch your email box fill with free-to-you data.

Alan Vanneman|4.29.09 @ 1:35PM|#

I can't wait until Nov. 2012, when Obama is re-elected and Matt's head explodes with poeto-ecstatic fury. After which he pulls it together and settles down to writing another four years of furious postings, only to commit suicide (along with me) when Joe Biden wins in 2016. Keep at it, Matt! You're the next Westbrook Pegler!*

*Nice Wikipedia piece on Westie here, the good and the bad.
http://en.wikipedia.org/wiki/Westbrook_Pegler

Fare and Ballast|4.29.09 @ 1:40PM|#

"I can't wait until Nov. 2012, when Obama is re-elected"

Me too! I hear he has a plan to repare all bad marriages.

|4.29.09 @ 2:04PM|#

Obama' mindset is that Banks Must Not Fail, because they are inherently more important than the people from whom (with the help of the feds) they are currently siphoning money.

"People- pfffft!- we'll toss 'em some cake crumbs, next time we need something. They'll do what we want, don't worry."

|4.29.09 @ 2:55PM|#

If "Stress Tests" Were Baseball, at Least Banks Would Be Hitting Over .300...At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests

But if this was baseball, isn't this 13 hits for a .682 average? Which, I'll note for the record, is still above .300.

Or is it six strike outs and there isn't enough information on the other 13 at bats to accurately decipher a batting average? Then again, isn't a batting average a poor performance indicator?

|4.29.09 @ 3:10PM|#

The multiplier argument, particularly as it is being employed by Obama in this case, is wrong.

First of all, bank lending has to be paid back. It's not magical money creation.

The Keynesian multiplier effect (if you buy Keynes) is supposed to come improvements in productivity, and mainly applies to the employment of unproductive labor. It really isn't supposed to be about airdropping cash randomly around the country. Economic "stimulus" is supposed to get workers employed in some productive activity which will ultimately produce some goods and services of worth that wouldn't otherwise get produced. If they are merely digging ditches, there's no productive activity occuring, and thus no multiplier effect.

Stimulating consumer demand does NOT have a multiplier effect, because it does not increase productivity in any way. Especially if such demand is based on lending which will have to be paid back in the future with interest.

|4.29.09 @ 3:15PM|#

What the President WON'T say is that the only way out of this is through recapitalisation (with your money) followed by massive deleveraging. That means smaller balance sheets or, in other words, LESS lending. That money is not coming back to you in the form of new mortgages or car finance or a higher limit on your Mastercard. It's a blood transfusion.

Or you can let them die, and allow other banks to grow into their market share.

What the government won't say is that there is no capital left to lend. All they can do is print money.

|4.29.09 @ 3:21PM|#

one of my most frequent questions in the letters that I get from constituents is, "Where's my bailout?"

If these letters are from poor people, I throw them away.

Astrid|4.29.09 @ 3:53PM|#

"It makes sense intuitively, and morally it makes sense, but the truth is that a dollar of capital in a bank can actually result in $8 or $10 of loans to families and businesses. So that's a multiplier effect that can ultimately lead to a faster pace of economic growth. That's why we have to fix the banks."

Um, I don't think multiplier effect means what Obama thinks it means.

T|4.29.09 @ 4:54PM|#

If these letters are from poor people, I throw them away.

As well you should. They're poorly written, full of misspellings, incorrect usage, and grammatical errors. If we've learned anything from the internet, we've learned people who do not express themselves near-perfectly in written communication deserve to be roundly mocked and excluded from the discourse regardless of the quality of their ideas.

Plus, as we demonstrated above, poor people aren't part of the economy.

Paul|4.29.09 @ 6:36PM|#

The multiplier argument, particularly as it is being employed by Obama in this case, is wrong.

Obama should point to the printing presses churning out money and say "See? Multiplier effect!"

|4.29.09 @ 9:38PM|#

Obama should point to the printing presses churning out money and say "See? Multiplier effect!"

That is, in effect, what he is doing.

The AntiFed|4.29.09 @ 10:10PM|#

The multiplier effect, otherwise known as the ratio between the monetary aggregates, is currently defunct. Recent measures put it at 1 meaning the banks aren't creating any money (money != currency).

The banking system technically will not be extending credit until the multiplier rises bank towards it's theoretical limit given the current reserve requirements. With reserve requirements at 10%, the maximum money multiplier is 1/(1-.9)=10.

Basic banking models...