We are supposed to be impressed with the speed and scale of government action on the bank front. As reported in the New York Times:
Nearly 100 federal banking regulators descended on Citigroup in New York on Wednesday morning. Dozens more fanned out through Bank of America, JPMorgan Chase and other big banks across the nation…
Details are scant. But exams for 18 or so of the biggest banks are set to begin immediately, and the first results could arrive within weeks. They are not expected to be made public for every institution. Regulators were also discussing whether to apply the stress test to small and midsize banks, according to an administration official.
This strikes me as grossly inadequate. I’ve had big banks as clients (including the then Citibank) and know what it is like to work with internal client data. It often takes a fair bit of digging and rectification to put what you’d think would be simple analyses together.
In the early 1990s, when Citi almost went under, it had 160 bank examiners working SOLELY on its commercial real estate portfolio (Citi has a lot of junior debt against buildings that turned out to be see-throughs).
I would welcome reader input (especially from bank examiners and accountants), but it is pretty clear 100 people and a few weeks (or even a few months) is grossly inadequate for a bank the size and complexity of a Citigroup. Citi has operations in over 100 countries. All 100 examiners can do is make queries along narrow lines, and work with the data presented. This scale of operation won’t allow for any verification or recasting of data. There isn’t remotely enough manpower.
And do you think these examiners are in any position to assess the risks of CDS, CDOs, swaps, foreign exchange exposures, Treasury operations, prime brokerage, to name just a few? I cant imagine US bank examiners have much competence in FX risk (Citi trades in a lot of exotic currencies, too), and that’s one of the easier to assess on the list above.
Now that isn’t to say they couldn’t develop this competence. In fact, Henry Kaufman (former chief economist of Salomon Brothers) has for some time argued that bank regulators around the world needed to form special groups with precisely these types of expertise to contend with the biggest, most sophisticated players. But they are not in place, and would easily take months to recruit and organize.
As a result, this is a garbage in, garbage out activity to placate the public and perhaps reassure investors. It would probably be fine for a strictly US bank which was a traditional retail and commercial lender (think a WaMu). But for the really big banks with capital markets operations, this is a joke. And those firms have and will continue to be the biggest recipients of the government dole.