Quelle Surprise! Banks Overestimating Their Health

Remember Lake Woebegone: all the women are beautiful, and all the children are above average. And all banks in robust health.

Self assessment (and undue self regard) was one of the big fallacies of the famed stress tests. The banks were asked to run scenarios on their own loan portfolios, with no independent verification of what was in them (as in no sampling of loan files, for instance). And on the trading side, the tests were run using the banks’ own risk models, which as we all know did a wonderful job in the run-up to the crisis.

Not everyone is convinced. The Financial Stability Board, a group of international regulators tasked with developing new international banking standards, ascertained that many of the 20 biggest banks are too optimistic about their health and warned against letting them exit close government supervision too soon. From Bloomberg:

“Some banks became dependent on this assistance and don’t seem to be able to detach themselves from the public support,” FSB Chairman Mario Draghi told reporters today after a G-20 meeting in St. Andrews, Scotland. “Some jurisdictions may continue to support unsustainable business models.”…

“While firms indicated that they had either fully or partially compiled with the most recommendations, the Senior Supervisors Group members found that these assessments were, in the aggregate, too positive,” said the FSB. “Much stronger ongoing management commitment to risk control” will be required to close the gap.’’….

Finance ministries should be wary of institutions wanting to exit the programs too quickly, the FSB said.

“Authorities may want to delay exit in order to preserve their freedom of action in case conditions again worsen,” the report said. “A terminated program that subsequently needs to be reinstated could undermine the broader credibility of the official sectors’ policy response.”

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  1. Jojo

    The banks know that our economy is one big game and that they will be bailed out if they guesstimate wrong [shrug]. No need to expend resources trying to be accurate; better to enjoy a long lunch…

  2. skippy

    Like big numbers see:

    Which brings us to our point: thank you Mr. Einhorn for finally starting to focus people’s attention on one of the many facets of the Fed’s uncontrollable liquidity Frankenstein. CDS, while destructive, is merely the appetizer. What will truly annihilate financial markets are all those instruments that are in place only to perpetuate the myth that a 5% interest rate in 30 year Treasurys is somehow exorbitant (based on a quick back of the envelope calc, should prevailing interest rates move higher by 1%, the net IR exposure will rise by $3 trillion… in the wrong direction… at an exponential pace). Yet what better way to keep rates where they are than than to tell China: “Hey guys, you bust one auction, and this spring loaded balloon full of $420 trillion pieces of worthless Washington feces will blow up right in your face (and take us all down with you).” In essence this is an amusing revision of that old fable: the Fed owes the world a few billion here and there: well, Ben, you are out of luck, “You’re Fired”; the Fed owes the world $1.4 quadrillion in naked and worthless pieces of paper (whose nudity will become apparent the second someone calls Bernanke’s bluff) and the Fed owns the world.


    Skippy…death by zeros…who would have thunkit!

      1. Skippy

        Their usage was with regards to the sky and not primarily to their economy, but when they did what was the out come of that said metric, zeros.

        Skippy…the universe has room for many zeros, but this planet does not me thinks.

  3. Dave of Maryland

    In Lake Woebegone, all the women are strong, all the men are good looking, all the children are above average. I believe that Mr. Keillor has never made a blanket statement as to the charms of the local females, but I have missed a few of the episodes.

    1. Siggy

      Isn’t Keillor’s home town Lake Wobegon, close by St. Paul and its ‘Dinky Town’ adjacent to the U of M?

      The so called ‘stress tests’ theater, spin, BS!

      There remains a very substantial quantity of worthless paper that is being carried at some value and which needs to go to zero. The Fed can’t stop the life support in that several ‘primary dealer’ banks will go belly-up.

      The Treasury is fast running into problems with funding the stimulus packages in that we started from an inordinantely high level of indebtedness. At some point we are going to have to accept the reality that debt repudiation is the last and only recourse.

  4. Jon Claerbout

    We love you out here in fan land, Yves, and want you to look great. My suggestion: “Quelle Headline” is not really a good headline; it’s more of a boiler plate — if that’s really what you want, OK, but I’m skeptical.

    1. psychohistorian

      Ah yes, here we are rearranging deck chairs on the Titanic and your concern was what?

      It is your turn to go make popcorn.

  5. joebek

    Jojo@5:32 believes the banks are counting on another bailout if things go south. Maybe they are, but it seems unlikely there will be another bailout on the scale of 2007/2008. Maybe they are calculating the cost of purchasing, stocking and providing for the defense against pirates of islands in the South Pacific. Maybe the banksters are the ultimate survivalists.

  6. winterwarlock

    That blackhole is about to get very big, very fast.

    They shorted the motor, global communication, running it in reverse, then discharged the battery, the middle class, to extend the ponzi scheme globally. Now they are burning up the components, one by one, throwing these non-performing assets into that blackhole, hoping to fill it, but actually feeding it.

    Expecting China to power the global economy is like taking the motor out of a Honda lawnmower, and placing it in a Hummer body before a cross-country trip. At this point, China can’t get out of its own way, because it is dependent on exporting to false economies, and internal participants have been practicing anarchy for centuries.

    Normally, operators exit through currency into depressed real estate, but that path has been eliminated by the younger generations refusing to supply demand. Now, they are chasing highly mobile talent with long-term capital traps, paid for with short-term debt.

    Because they bred the majority of the population for response to fear stimulus, there will be fear, as the old economy shrinks toward the core of ponzi scheme operators.

    I was talking to a union president in MA just the other day, with a third of his men on the bench, and he was bragging about making six figures, while all his henchmen were still working …

    1. winterwarlock

      … when I was in San Diego, I applied for welfare. The agent told me in no uncertain terms that I would have to register to vote and vote Democrat. I accepted, and received an EBT card almost immediately, with no possible investigation of my paperwork.

  7. Michael Donner

    didn’t the stress test say something about unemployment rates…like less then 9.8 was used as the upper limit and now taht we are at 10.2 should something be triggered that was part of that ‘way back when’..when no one remembers now with h1n1 and all the diversions ??? they count on short term memory it seems..all the time..and it works.
    even the most ‘pessimistic’ standards used in the stress test have been surpassed, no?
    with what demand put in place against the big 19??
    the farce continues unabated it seems

  8. Doc Holiday


    Thanks Yves for keeping an eye on this dumbass bank-ball that rolled from the gutter into the sewer a long, long time ago! I know it’s not fun going through this sludge as a janitor and then somehow being able to make sense of this reverse engineered slime — but thanks for your efforts!!!!!!

  9. timbo


    Is it even possible to nationalize a group of banks that have already privatized the nation?

    Maybe the Fed should just print enough money to buy the whole sector, we can put a giant blanket over it (made in China of course), seal the books for 25 years for national security, and call it a day.

    Trying to evaluate the relative health of a ponzi-scheme is high science, and many, many more experts are needed from far and wide.

    Did i slip down a bunny-hole in the universe in the last 2 years, or have I been here the whole time?

  10. Hugh

    Pick a date: August 9, 2007 or September 15, 2008. You can argue that the US banking system became insolvent on the first, certainly the second of these dates. Despite trillions in bailouts, it is still insolvent. This will remain the case until the paper economy is dismantled and the financial system is restructured or crashes.

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