BANK´S STRESS TEST : Flawed

Goldman Sachs, the most-profitable securities firm before converting to a bank last year, received more cash from AIG after the Federal Reserve rescued it last year than any other counterparty. Their 09 first quarter numbers are “questioned” by the Street.

“Actual Macro Data are already worse than the more adverse scenario for 2009 in the Stress Tests. The Stress Tests fail the basic criterion of Reality Check even before they are concluded”, says Nouriel Roubini…

And , if you look at the actual data today for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in FDIC baseline scenario for 2009 and even worse than those for the more adverse stressed scenario for 2010.  Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.

The FDIC and Treasury used assumptions for the macro variables in 2009 and 2010 both the baseline and more adverse scenarios that are so optimistic that actual data for 2009 are already worse than the adverse scenario. And for some crucial variables such as the unemployment rate – that is key to proper estimates of default rates and recovery rates (given default) for residential mortgages, commercial mortgages, credit cards, auto loans, student loans and other banks loans – current trend show that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009 !!!

And our question is,  how are we going to make realistic observations and investment decisions if the WHOLE SYSTEM is flawed ?

http://www.fdic.gov/news/news/press/2009/