Since the announcement that the federal government was going to perform stress tests on the nations 19 largest financial institutions, economists questioned just exactly would that mean? What was going to determine if a bank was “strong” or not, and if not, what action was going to be taken.
Well, it turns out that the real findings of the stress test may not be know… and what the general pubic is viewing, in terms of results, is a negotiated – seemingly random number – developed by the banks and the government.
Take a look at this via the Wall Street Journal:
When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of AmericaCorp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed’s exaggerated capital holes. A senior executive at one bank fumed that the Fed’s initial estimate was “mind-numbingly” large. Bank of America was “shocked” when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations.
At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks’ ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions.
…
The Fed ultimately accepted some of the banks’ pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter.
Bank of America’s final gap was $33.9 billion, down from an earlier estimate of more than $50 billion, according to a person familiar with the negotiations.
A Bank of America spokesman wouldn’t comment on how much the previous gap was reduced, though he said it resulted from an adjustment for first-quarter results and errors made by regulators in their analysis. “It wasn’t lobbying,” he said.
Wells Fargo’s capital hole shrank to $13.7 billion, according to people familiar with the matter. Before adjusting for first-quarter results and other factors, the figure was $17.3 billion, according to a federal document.
“In the end we agreed with the number. We didn’t necessarily like the number,” said Wells Fargo Chief Financial Officer Howard Atkins. He said the company was particularly unhappy with the Fed’s assumptions about Wells Fargo’s revenue outlook.
The financial institutional that faced massive losses over the last six months didn’t like was was said about them, and their ability to provide capital for operations, so what do they do? Complain to the federal team who, for a lack of better terms, was auditing them. And their complaining got them what? Numbers that are more favorable to their business operations.
Just so I understand.. the government was to do a test to determine if a bank was financially sound, once performed it turned out that a bank was not and additional funding was needed. Offended, the bank put up a stink and the government changed their findings to be more favorable to the bank.That is like me saying “I don’t like the C+ I obtained while taking my masters level mid-term, I want a B” and the teacher simply giving it to me simply because I asked.
If that is NOT a sign that the stress tests performed on the U.S. financial institutions are meaningless, I don’t know what is.
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