Comments on: Grading on a Curve

By: q

Fri, 08 May 2009 17:44:14 +0000

when it comes down to it, i think what the stress tests show more or less accurately is the level of losses that the US banking system can withstand at current levels of capitalization.

By: Rita

Rita — Fri, 08 May 2009 15:09:51 +0000

Banks negotiating with their regulators regarding negative results of exams and the actions to be taken is anything but unusual. (This probably holds true for other regulated institutions like drug companies and telecommunications.) Sometimes the bank prevails and sometimes it doesn’t. We hope that the regulators (and the Obama Administration) were professional in their assessments and fair in their negotiations.

By: Linus Wilson

Linus Wilson — Fri, 08 May 2009 14:05:53 +0000

According to the WSJ, the stress test wanted banks to have a 25-1 common equity to Tier 1 assets leverage ratio. A 25-1 tier 1 common equity ratio in some sense understates the risk regulators are signing off on. Tier 1 assets are less than book assets. This means that the Fed thinks it is alright for mega banks 30-1, 35-1, or 40-1 leverage ratio based on book assets. If one looks at market prices or the stress test results, Goldman Sachs seems to be one of the healthiest of the top TARP recipients. Nevertheless, from my calculations on pages 20 to 21 of “The Goldman Sachs Warrants” at http://ssrn.com/abstract=1400995, Goldman Sachs assets had a 5 percent standard deviation from January 1, 2008 to May 1, 2009. (On May 1, 2009, GS had a 15-1 leverage ratio of book assets over the market value of common equity.) At more leveraged banks, a 5 percent standard deviation of assets means that there is a substantial likelihood that their assets will be worth less than their liabilities. It is too bad that the Fed also believes judging from its actions with regard to Bear Stearns and AIG that taxpayers should be on the hook if these banks turn out to be insolvent and in need of emergency help.

By: le grain de sable

le grain de sable — Fri, 08 May 2009 09:56:26 +0000

When banks rise from the dead

http://www.markfiore.com/zombie_bank_0

By: DesolationRow

DesolationRow — Fri, 08 May 2009 06:38:49 +0000

Hopefully Geithner’s office is far from Arne Duncan’s. Saying you won’t allow anyone to fail not only doesn’t motivate good behavior in the future but seemingly kicks a real and present problem down the road. Does the administration have any leverage for reform at this point? Whoever it was that said we need to start framing the discussion for the 2010 and 2012 elections was spot on.

By: Blankfiend

Blankfiend — Fri, 08 May 2009 06:30:01 +0000

Speaking of curves… How about parabolic Treasury yield spikes?

What happens to home prices and mortgage losses when Treasury yields ramp? How much house are people going to be able to afford with a >10% interest rate? What happens to the ARM resets? Who is going to stay in their 500K submarine of a home when the neighbor just moved in for 150K?

Were higher government borrowing rates and consequent higher mortgage rates part of the “stress” scenario?

The ongoing TNX ramp may be a more important and immediate danger to bank solvency than unemployment rates