The Truth about the Bank ‘Fudge Tests’
Source: http://feedproxy.google.com/~r/ContrarianProfits/~3/wgWvxExgI28/16334Posted on Wednesday, May 6th, 2009 | In Market Commentary
“The data we have are accurate reflections of the financial conditions of those banks,” says Fed head Ben Bernanke regarding the stress test results… Hmmm…
Didn’t Bernanke also recently lean on BoA CEO Ken Lewis to commit securities fraud by not declaring losses at Merrill Lynch prior to its takeover by BoA? We appreciate that Gentle Ben is just doing his job and all. But does he really think we’re going to trust him following the Merrill-BoA episode?
We don’t believe a word Bernanke says about the economy… or about banks. As NYU economics professor Nouriel Roubini put it recently, the stress tests (or “fudge tests” as he calls them) aren’t worth the paper they’re written on. They’re meaningless, because they have been reverse engineered to create positive results. Here’s Roubini on the subject:
If you look at the actual data today macro data 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 U.S. government baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.
Nassim Nicholas Taleb, a scholar of risk and chance at Polytechnic Institute of New York University, author of The Black Swan:
The Impact of the Highly Improbable: “This stress test is the equivalent of testing the Brooklyn Bridge by running a single heavy truck on it.”
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