The Fed Stress Tests While Europe Starts to Burn

Our headline at odds with the media reports on the newest confidence-bolstering ploy by the Federal Reserve, that of new, improved stress tests for the six banks at the apex of the US financial services industry looting operation: Bank of America, Citi, Goldman, J.P. Morgan, Morgan Stanley and Wells.

There’s a noteworthy gap between the scenarios employed in the 1.0 version, which took place in early 2009, when the banks were told to get more capital or else, and the ones about to be implemented. The current stress scenario is a Eurozone crisis, with unemployment to reach 13% in the US (versus a 2009 stress test peak in the “adverse scenario” of just over 10%), a European GDP contraction of 6.9%, and (supposedly) “market price movements seen during the second half of 2008.”

Per the Financial Times, the benchmark will be whether core “tier one common” equity stays higher than 5 per cent in the face of these projected conditions. Banks that fall short (and everyone sees Bank of America as the likely problem child) may be forced to raise equity. Firms that plan to issue dividends in excess of 30% of net income can expect further scrutiny by the central bank. The Wall Street Journal reports that the subjects are grousing about how badly they are being treated, including that staffers will have to work over the holidays (banks are to submit information by January 9, with the results due in March). Not surprisingly, per the Journal, this is yet another confidence ploy:

The switch to public disclosure [a change from a 2010 version of the exams] is the Fed’s way of demonstrating that the U.S. banking system can withstand any turmoil, said analyst Gerard Cassidy of RBC Capital Markets. The hope is “investors will say, ‘Wow the U.S. banking systems can handle these shocks very well,'” Mr. Cassidy said.

This all sounds well and good, right? We’ll get to the adequacy of these tests in due course, but the reporting conveniently ignores the fact that the Fed has gotten religion appallingly late in the game.

Pretty much anyone who was not part of the problem (admittedly a small group relative to the financial services industry propaganda machine) expected a major financial crisis in a maximum of five years after the last one. And there was also a widely shared expectation that the next eruption would be worse, given the failure to address core problems: excessive interconnectedness, overly high leverage, both at the institutional and the product level, opacity, and complexity. These conditions are made worse by the fact that major financial institutions operate internationally when times are good but are supervised and backstopped by their home country.

Somehow, the Fed has managed to wear blinkers since May 2010. As soon as Greece started going wobbly, a horde of analysts pointed out that the bond losses were likely to be in the 50% to 75% range, and contagion was a realistic possibility. Contagion not only arrived but metastasised while the Eurocrats engaged in policy shamanism in lieu of painful cures. Did US regulators not notice that Italy faces a major hurdle in February 2012, with €300 billion of debt to be refinanced? What good are “tests” to be scored in March against that timetable? And things are not getting any better in the meantime. Consider these extracts from the Tuesday market wrap at the Financial Times:

Bond markets ramped up the pressure on Spain and Italy on Tuesday as Madrid was forced to pay more for three-month debt than Greece did last week while Italy saw its yield curve invert, a sign of severe stress.

Spain paid an average yield of 5.11 per cent for the three-month bills, more than double the rate it paid last month and higher than the 4.63 per cent Athens paid last Tuesday.

Italy saw yields of all its bonds from two- to eight-years rise above its benchmark 10-year note, normally a sign of impending recession. The inversion of its yield curve last happened two weeks ago but, unlike then, purchases of Rome’s bond by the European Central Bank on Tuesday failed to undo the damage…

“With nothing to oppose higher yields these moves are effectively self-perpetuating and the spiral is vicious,” said Robert Crossley, head of European interest rate strategy at Citi.

In another bad day for eurozone bond markets, Belgium saw the premium it pays over Germany to borrow reach a new euro-era record of 323 basis points…

Bond markets have given no respite to the new governments in Spain of Mariano Rajoy and in Italy of Mario Monti, pushing borrowing costs to levels close to those that forced Greece, Ireland and Portugal into international bail-outs.

And if that isn’t troubling enough, on top of the generally recognized slow motion bank run in Greece, deposits are draining out of Spanish and Italian banks.

With that as backdrop, let’s revisit the adequacy of the stress test metrics. 5% tier one capital is simply not the right measure. Is the Fed really going to test for a repeat of the 2008 seize up in the repo market? A former Goldman employee involved in Occupy Wall Street reminds me that you couldn’t even repo 28 day Treasuries, which in trader land was tantamount to the opening of the sixth seal of the Apocalypse. No one wanted to deal with counterparties, period, even with the most pristine collateral. Yes, banks are widely reported to have much better liquidity buffers than last time around. But the Titanic was also believed to be unsinkable.

There is every reason to expect the upcoming European crisis to be not as bad as the last one, as the Fed assumes, but worse. The banking systems in the US and Europe are more concentrated than before. Advanced economies are in much weaker shape. There is far more active, organized, and vocal opposition to bank bailouts in Europe that the first go round in the US, when widespread public objections to the TARP were steamrolled in Congress.

Now the Bundesbank and the ECB, despite their loud insistence to the contrary, may come around at the last minute and stave off a Euroimplosion. But the stress test is not supposed to measure what happens in a happy ending, but in a realistic downside scenario. And perhaps the biggest difference between 2008 and now is the lack of a common vision among the central actors in the epicenter of the pending crisis. In the US, the three key players, Paulson, Geithner, and Bernanke, had shared goals: do whatever it takes to keep the system from collapsing and to the extent possible and preserve the status quo. The first goal was arguably necessary, while the second one was the polar opposite of what needed to happen once some measure of stability was restored.

By contrast, in Europe, you have banks in Greece, Spain, Italy, Portugal, Belgium, much of Eastern Europe, France and Germany at risk. Any serious problems, ex an ECB deus ex machina, must be dealt with at a national level. How is that going to happen when the Eurozone banking system is 325% of GDP, far bigger relative to the size of the economy than in the US?

The risk here is not a Lehman like disaster. It’s a modern version of Credit Anstalt: a major bank failure precipitating cascading collapses. And this is entirely plausible. There are a ton more moving parts than in the US in 2008: more institutions at risk, multiple domestic banking regulators and national legislatures, Maastrict treaty rules. Anyone who has worked with networks knows that more nodes and more communication lines between those nodes means more points of failure. The odds of things ending up badly if the markets go critical are far greater than the last time around, and that’s before we factor in the caliber of Eurozone emergency responses thus far.

I cannot fathom how people in senior regulatory positions who lived through the crisis cannot see the trajectory. It’s obvious to anyone who reads the financial press. This willful blindness, born out of a reluctance to firmly enough with a reckless, predatory industry will cost the citizens of the world dearly. I can only hope history deals with these corrupt officials as harshly as they deserve.

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  1. Jesse

    The risk here is not a Lehman like disaster. It’s a modern version of Credit Anstalt: a major bank failure precipitating cascading collapses.

    I’m asking this seriously: How was Lehman not a major bank failure precipitating cascading collapses? i.e. What’s the difference between Lehman and Credit Anstalt?

    I cannot fathom how people in senior regulatory positions who lived through the crisis cannot see the trajectory.

    Is this one of those things where they’re incapable of “thinking the unthinkable”, since their entire well-being depends on it not happening?

    1. Waking Up

      “Is this one of those things where they’re incapable of “thinking the unthinkable”, since their entire well-being depends on it not happening?”

      I don’t think so because as Bill Black
      states in regard to the Savings & Loan
      Crisis, “Our agency filed well over 10,000 criminal referrals that resulted in over 1,000 felony convictions and cases designated as nature. And even that understates the grade in which we went after the elite. Because we worked very closely with the FBI and the Justice Department, to prioritize cases—creating the top 100 list of the 100 worst institutions which translated into about 600 or 700 executives—and so the bulk of those thousand felony convictions were the worst fraud, the most elite frauds.”

      Now we have a captured and corrupt financial
      regulatory system and the people within it
      work on behalf of the industry, not the
      the people.

  2. SteveA

    Let’s recall with a grim smile that Dexia passed the EBA stress tests with flying colors last summer. Before it blew up. And before it became a millstone around the neck of France and Belgium (who this A.M. are fighting over how to fund that sinkhole).

    Bernanke and Geithner can dress up as the confidence fairy as much as they want — the markets are smarter, and will be gauging whether another TARP is politically possible if the economy goes further south and the banks can’t fund themselves again. Is a massive use of UST funds politically feasible a second time?

  3. Max424

    Excellent post, Yves, so clearly written that an ignoramus like me can see it all, in his mind’s eye: cascading bank failure, not of the domino variety, where a domino can be moved out of the firing line to shut down an “event,” but of the dam bursting variety, where all the banks, in the valley below, are helplessly washed away.

    “I can only hope history deals with these corrupt officials as harshly as they deserve.”

    History? Giggle. History is only thing that will deal harshly with these people. If you want a belly laugh, replace the word history with, “the FBI.”

    Note: Don’t use “the DOJ,” because you might hurt yourself … rolling around on the floor.

  4. jake chase

    I think you are overestimating the liklihood of European collapse. The problem is so serious that Germany has no choice but to go along with a bailout of peripheral state debt, and the only question is the size of “voluntary” creditor haircuts. What will happen back stage, between the Fed and the ECB, only God knows, but those betting on collapse will be seriously disappointed; when the bailout happens markets will soar. Asset inflation, here we come!

    1. Antifa

      Indeed, the most likely scenario. The powers that be will violate any treaties, laws or regulations they need to in order to keep things afloat a while longer. They cannot see their world end. Public opinion and referendums be damned!

      Expect the IMF to play a big part. Where it gets its funds will be a widely asked question. Most likely the ECB or more secret trillions from the US Federal Reserve, loans which will be revealed to the American public some years hence.

      What will NOT happen is what the law requires, which is a bank holiday while all the books are opened, debts that are never going to be repaid are written off, every existing CDS contract is declared null and void, and investors who put money at risk lose that money.

      And prosecutions, or at the very least some kind of Truth and Reconciliation Commission.

      The captains in charge will drown everyone else before they admit there has been an iceberg, and a collision, and there is a great hole in the bow, and yes, we have no lifeboats for the little people.

      But they need to get it done before the riots get out of hand . . .

      1. F. Beard

        and yes, we have no lifeboats for the little people. Antifa

        Let’s not forget that the problem is mostly about money, which is mostly electronic accounting entries that can be changed in a instant.

        All we need is a general bailout (per Steve Keen) and fundamental reform.

        1) Who would refuse a bailout check?
        2) Who denies we need fundamental reform in money creation?

      2. K Ackermann

        Where it gets its funds will be a widely asked question

        Special Drawing Rights. A new fiat backed by us little people without them even asking.

        Smash the system!

    2. Mat Albert 5416

      Bernanke and Geithner are probably on the phone right now, urging the ECB to start printing and bailing out left and right, and forget about minor little details, such as legal restrictions, EU treaties, approval by EU member states, etc

      1. Yves Smith Post author

        You folks need to read a recent interview of the head of the Bundesbank, which pretty much calls the shots (as in the Bundesbank and ECB move in lockstep). This is as clear a statement of “we aren’t doing bailouts” as you can imagine.,1518,797666,00.html

        Money quote:

        .One man is bracing himself against the storm. In the battle to save the euro, Europe’s monetary watchdogs are under growing pressure from around the world to buy up unlimited quantities of the sovereign bonds of ailing member states. But the head of the Bundesbank is saying no, and he is making his message loud and clear, not only in Berlin, but also in Brussels, Paris and Washington. If the ECB gave in to the pressure, Weidmann argues, it would not only be violating European treaties and the German constitution. Such a move would also be “synonymous with the issuance of euro bonds.

        The interesting bit on this thread is the assumption that EU leaders have the same assumptions and will act the same way as US leaders did in our crisis. Campaigns are FAR more corporate money driven in the US than in any other advanced economy. The interests of the banks and that of the political elite are not as tightly intertwined as here. More broadly, I’ve done work repeatedly in foreign cultures. The biggest mistake Americans make (and they make it all the time) is projecting their behavior on to other cultures. Finally, if they get bank religion too late, that produces the same outcome as not getting it. Market timetables are much faster than political timetåbles.

        1. Mat Albert 5416

          The pessimist in me is still not convinced, however I just read John Hussman’s most recent comment and apparently he agrees with you:

          John Hussman: “….Given the disregard that Ben Bernanke has shown for the restrictions of the Federal Reserve Act, it is tempting for Americans to minimize the cultural differences that keep Europeans, particularly Germans, from doing the same thing…..(but)……..”There are strong legal restrictions among the EU nations against solvency operations by the ECB, and even if one believes that this is inevitable, the chance of the ECB deciding to abandon EU Treaties on its own is zero, in my view….”

        2. myshkin

          You may be right to some extent that it is a false, “assumption that EU leaders have the same assumptions and will act the same way as US leaders did in our crisis… The interests of the banks and that of the political elite are not as tightly intertwined as here… Finally, if they get bank religion too late, that produces the same outcome as not getting it.”
          It seems Angela Merkel is really the wrong person to lead at this moment in the euro crisis. She can be counted on, as Churchill commented on the Americans, ‘to do the right thing only after having tried everything else.’ She is driving the spiral further downward in her recalcitrance to act before things go from bad to worse.
          The flop of today’s German bond sale manifests once again that after largely causing the global crisis, the banks and the rating agencies are exacerbating the problem. How long will this be allowed to go on before someone puts a leash on them. It seems more likely it will happen in Europe than here in the US.
          As for those who want the whole thing to blow up so that it can be rebuilt in some hoped for better manner, this seems unrealistic and courts unimaginable disaster.

          1. Jim

            The same “unimaginable disaster” as would have occurred in the US had Bush and Obama not bailed out the financial sector?

            I disagree.

            Prove me wrong. Prove to me that bailing out Greece and Ireland saved the world from a depression.

            Prove to me that the ECB monetizing Italian debt is necessary to ensure that the global economic system does not implode.

            Prove to me that if Italy brought back the Lira, it would not be posting real growth of 6% in a couple of years, as Argentina did when it brought back the peso.

          2. myshkin

            “The same “unimaginable disaster” as would have occurred in the US had Bush and Obama not bailed out the financial sector?
            I disagree.”

            – We all know the American bailout was a bailout of Wall Street and the banksters, it did not have to be thus, the target could have been to ease the lot of those Americans drowning in debt and mortgages. The bailout could have been directed bottom up not top down and the too big to fail institutions, if failing could have been broken down piecemeal and resolved.

            “Prove me wrong. Prove to me that bailing out Greece and Ireland saved the world from a depression. Prove to me that the ECB monetizing Italian debt is necessary to ensure that the global economic system does not implode…Prove to me that if Italy brought back the Lira, it would not be posting real growth of 6% in a couple of years.”

            Of course that can’t be proven one way or the other without access to a crystal ball. The origins of the ongoing global economic train wreck are often located in 2008, though of course the train had left the station some time before, during the era of dereg. I am wary of those who believe in a cleansing destruction or in this case ‘implosion’ in whose ashes or vacuum a new and better financial construction will be built. I suspect that in the observable world of human fallibility and compromise it is wiser to avoid the implosion, the pain of which will fall mostly on those who can least sustain it. Muddling though and reforming as we go is less dramatic but I believe the wiser alternative. The Euro bond is most likely the way out, Merkel is coming around slowly and late, as she has at each crisis, always making it worse than it need be.

        3. Jesse

          I’ve yet to read the article, I just think there’s a disbelief on many people’s part that they’d let the whole thing implode instead of doing the obvious solution. It’s not about, “projecting [American] behavior on other cultures”, it’s about avoiding catastrophe.

          1. Susan the other

            I think it is an American Standoff. We were dedicated to Europe after WWII. But now, not so much. I feel like we were thrown under the bus in the wake of 2008 by the EU banks and in return we are now throwing them under the bus. Ah, revenge. Nevermind how insane it is.

          2. Jim

            So the “obvious solution” is to trample democracy? The “obvious solution” is to violate the agreement made between the ECB and the German voters – that the ECB would never monetize debt?

            Jesse, would you be so amenable to the “obvious solution” if President Gingrich decreed that Medicare would be rendered a defined contribution program, “for the sake of the nation”?

            Or is it OK to violate democracy and the constitution in Europe, but not in the US?

          3. Jesse

            If doing alterations to Medicare was the only!!! realistic way to prevent a great depression-like event (it’s not), then yes I would.

            And I love your great commitment to democracy after Germany ensured that the Greek people would have no say via referendum in their own country’s plans.

        4. Lune

          Hi Yves,

          I’m not so sure that banking and government elites in Europe are less intertwined than in the U.S.

          While in the U.S., the relationship is more monetary in nature (banks funding campaigns and giving cushy jobs / speaking engagements afterwards), in Europe, it’s much more cultural. Much of the elites in both the private and public sector come from the same schools, upbringings, etc. Plus, given that the countries are much smaller than the U.S. (both geographically and population-wise) the “soft” ties of personal relationships / familiarity are much closer than in the U.S., I’d expect.

          Those personal and cultural ties can be as corrupting as pure financial dependence. After all, Tim Geithner, for all his faults, has never worked a day in the private sector, has never needed to accept corporate donations for a campaign, and likely expects to spend most of his life in the public sector. Yet he is probably more captured in his thinking than the President who will be taking a billion dollars of corporate money in the coming year…

        5. Moneta

          Germany does not have a real estate bubble. It’s a net exporter and has lived through hyperinflation.

          It will do whatever it needs to do to keep its currency low and not pay for others’ profligacies for as long as possible.

          1. Procopius

            One of the underlying causes of the problem is Germany’s trade surplus — especially with the Eurozone peripherals. Their preferred procedure of imposing austerity means they aren’t going to be able to sell as much as before to their former trade partners. I don’t think that’s going to lead to an improvement in the German economy.

            Incidentally, the Germans shouldn’t be so quick to talk about “profligate” governments. In the early years of this century they regularly, year after year, violated the limit on deficits and basically told Brussels to shove it.

  5. Moneta

    If a mess was created with easy printing of billions over decades, imagine the coming tsunami considering the trillions that were distributed over 3 years without scrutiny.

    The writing is on the wall. Anyone thinking that all this money went to productive areas is completely deluded.

  6. F. Beard

    Banks that fall short (and everyone sees Bank of America as the likely problem child) may be forced to raise equity. Yves Smith

    If banking was done ethically, the money a bank lent out would BE its common stock. No bank runs would be possible since common stock is normally non-redeemable. But of course this model would “share” wealth and power.

    Firms that plan to issue dividends in excess of 30% of net income can expect further scrutiny by the central bank. Yves Smith

    Common stock instead of being used AS money is instead used to reap money – to take profits. But why would anyone wish to take profits out of a sound business? Should not those profit remain within the business to improve it?

    Our problems result from an artificial separation between equity and money. Money, instead of being a means to share wealth, is instead used as a means to steal and concentrate wealth.

  7. ep3

    ” ‘Wow the U.S. banking systems can handle these shocks very well,’” Mr. Cassidy said”
    yes, great, wonderful. too bad the american worker people won’t be able to handle such chaos.

  8. slothrop

    ” Contagion not only arrived but metastasised while the Eurocrats engaged in policy shamanism in lieu of painful cures”

    Why “painful cures” for the EU but not for the US? Because as you so often point out, we can lend to ourselves.

    If there is any shamanism going on, Ms Smith, that’s it.

    1. Yves Smith Post author

      You must be new here. Please go back and read my writings in 2008 and 2009. I’ve called for prosecutions, bank nationalization, and serious reforms. Your charge is off base.

      1. Tim

        To Slothrops defense I do get the impression from the articles cross posted here that you see money printing as A (but not the only) part of the correct solution among the other positions you just listed.

        Maybe that impression is incorrect and you are merely demonstrating it is a lesser of two evils compared to rapidly implemented austerity (which I absolutely agree with).

        I do not believe that any money printing is any part of the correct long term solution. I believe the fixes you listed plus defaults/bank holidays followed by gradual austerity implemented over a decade or more that converges government expendatures with tax revenues. I know, way too ideological and politically impossible.

  9. YankeeFrank

    We can only pray the Europeans let it all collapse because without the collapse of the banking system we are all doomed to become debt slaves to the banksters. If governments continue to prop up bankrupt banks with taxpayer monies where will it end? They’ve made it clear they will not reform and prosecute, so why should we fear their collapse? We should instead fear their continued existence. Though the heavens fall, the banks must collapse.

    1. steelhead23

      We are kindred spirits. Of course, when the collapse occurs, panic will ensue and some very bad things may happen. So we should temper our desire for it to happen. On the other hand, one hell of a mess still beats slavery, by a long shot.

        1. Bhikshni Lozang Trinlae

          And try to die not harming others!

          Thanks for the fantastic writing here by Yves & in the comments!

  10. Ye Olde Eric

    I have a nit to pick with using the term complexity rather than at best disorganization or incompetence, and at worst obfuscation. Complexity leaves room to infer that the underlying problem has no good solutions, and gives an out to mismanagement. It may seem like a trivial distinction, but I think it’s wide enough to keep a lot of people from being prosecuted.

    Sorry to split hairs, but if I found that a veteran programmer had designed a list sorting algorithm that ran in time proportional to the square of the number of items in the list, my spidey sense would tingle, and I would not say the problem is complexity.

    1. scraping_by

      Think of “complexity” as the polite term for it. It loses something in print, as you can’t do the leer and wink with the same chilling effectiveness.

      Among the other, more accurate, translations of that term I like “patter”. The idea that you’re running a verbal noise to keep the mark from thinking the deal through, keeping him in the chair until you can slap the contract and pen in front of him and walk away knowing he won’t find out the kicker for weeks if not months, seems a world away from multimillion dollar financial instruments. But it’s definitely part of the sell.

      The crowd of overpaid professionals will never admit, in public, they were buying cochon en poche*, but a lot of times the losses were due to simple bad deals. They thought they were cheating and got cheated.

      *Yes, but on this site chats are sacred. Think Pharonic Egypt.

    2. Ye Olde Eric

      I don’t want anyone to think that I am finding fault with Yves. It’s just that financiers seem to get a pass on hiding behind complexity whereas a building contractor or a waste treatment operator might not.

      Complexity is a valid term, but I think it should be qualified as to whether it was purposely introduced or not. The difference is between cause and effect.

      It should be a truism, that as technology improves, costs should decline. Yet we suffer the opposite, in finance, in health care, etc.

      Please keep fighting the good fight, Yves, but beware.


    … While Europe Starts to Burn

    Honest to goodness guys ‘n girls, here I am in the middle of France and – gracious me – I don’t even see the smoke!

    The supermarkets are full. The highways chock-a-block. No penury of fuel for the winter. Christmas glittering all over the place commercially. Not even the cows are in a dither.

    Maybe the ego-centric view (intermittent with navel contemplating) from Wall Street is different? Yeh, that must be it – especially the perspective from Zuccotti Park.

    From there, it’s the world upside down?

    1. YankeeFrank

      You’re a douche. Go to Greece, Ireland, Latvia, Spain (with 20% unemployment) and then let us know how its all so great out there. No one says the rich and upper middle class aren’t doing fine. Or better yet why don’t you step out to the infamous Paris ‘burbs before “reporting” all is well from the poop deck.

      1. LAFAYETTE

        Our daily dose of (ad hominen) black pleasantry? Keep it to yourself.

        There are far more people going hungry in the US, where the holes in the social safety nets would not stop an elephant in free-fall, than in Europe

        Get my dander up and I’ll find the comparative numbers, then spit them at you.

        1. Foppe

          Oh, “in europe”, certainly, but when you look at what the northern european countries are forcing the southern ones to do to their social safety nets, things are not quite so neat as you present them here. Then, you suddenly notice that even while they’re maintaining their own safety nets, they’re not allowing the rest of the EZ (and hungary/romania/latvia/etc.) to do so at all.

        2. wERD

          I hope you are ready for your social safety nets to disappear/get destroyed too. Or do you somehow think that austerity is not coming to France?

          Have fun when the vultures come out to cut back all the social programs that France has, because “they are suffocating business and destroying the economy by enabling a bunch of lazy, free-loaders”.

    2. Patrice


      Before getting too carried away with optimism, you might spend a moment or two reflecting on these words from Arthur Schopenhauer:

      “We can regard our life as a uselessly disturbing episode in the blissful repose of nothingness.”


      “How very paltry and limited the normal human intellect is, and how little lucidity there is in the human consciousness, may be judged from the fact that, despite the ephemeral brevity of human life, the uncertainty of our existence and the countless enigmas which press upon us from all sides, everyone does not continually and ceaselessly philosophize, but that only the rarest of exceptions do.”


  12. LeonovaBalletRusse

    Yves, thanks for contributing on the fly, come hell (dentistry) – but you’re gonna be a movie star!

    I saw your comment yesterday on the LINKS re Corzine’s being exempt from taking the Series 7 (and Series 24) before taking the helm of MF Global. You remarked that everybody in the early 80’s had to take the Series 7. Quite right: this was the sine qua non for entry into the retail ranks of brokerage houses, and I passed the test to become a rookie “Account Executive. What may be pertinent, is that the Series 7 of 1980 was different from those before that date: it went heavy on testing for “arbitrage” chops.

    Maybe they didn’t want Corzine to be held responsible for the *limits* on what brokers could do, which his passing the test would have guaranteed. Without the test, maybe they thought he could claim ignorance of the rules. Maybe they thought he couldn’t pass the test, or that it would have taken too much time for him to learn the new material. So, wasn’t he *just taking orders*?

  13. K Ackermann

    BAC closing in on a 4-handle.

    “They say he suffered miserably for a long time before he died. He asked for you repeatedly. There was so little left of him, that they had to fill the casket with cotton to prevent his bones from rattling around.”

  14. steelhead23

    Yes, U.S. regulators should have been acutely aware that a serious European banking crisis would swallow U.S. banks – but let’s look at what has happened in Europe to avert such a disaster. I am of the opinion the all actions taken by the IMF have been pre-approved by the U.S. As the IMF has precipitated quiet coups in Greece and Italy, I am of the opinion that the U.S. has done plenty. Yves, this may be a tad over the top, but it appears to me that there is a global revolution underway. Not a communist/socialist takeover, but a takeover by the monied elite, with the various governments and public institutions lending a hand. Given this view, which I admit is both radical and not wholly rational, collapse of the global financial system is desired, not feared. Sorry if I sound like a whack-job, but I no longer see any other solution that doesn’t lead to neo-feudalism. Am I alone?

    1. Susan the other

      It is safe to say that for the last 30 years we have been aware of the possible outcomes of our “financial” actions and those of Europe. To pretend that now, all of a sudden, we are on the ropes is silly. This crisis is driven by something far deeper and higher that mere human capitalism-euphorics. Whenever I hear an anti-bildeberger (whatever that is exactly) comment that they (bildebergers, etc.) are taking over the world, I say to myself: but why would anybody want to do that? It is such a mess.

      It’s also naive to assume that any other country knows what it is doing better than we do. We’re all idiots.

      1. LeonovaBalletRusse

        History shows that people want to “take over the world”–i.e. have a complete monopoly over its operations and resources–so that they may govern all others as they see fit, and loot the world without impunity. This is why “tyranny” is the kiss of death for the majority.

    2. Bhikshni Lozang Trinlae

      With Goldman in the Fed, ECB, and Greece, (etc.?) the evidence for US-Euro linkage doesn’t appear to be unfounded to this reader.

  15. Woodrow Wilson

    “the newest confidence-bolstering ploy by the Federal Reserve” –

    I seem to remember Europe doing this sort of thing and saying all is well. How’s Europe now?

    Pretty sure all the regular readers here know the deal, we’ll be lied to. The only question for Americans is: “What comes next and when?”

  16. Eric377

    The ECB continues to operate within – or at least plausibly close to – its legal authority. Shame on them!

  17. RueTheDay

    The assumptions this time seem far more realistic than the ones employed in the previous stress test. What I can’t fathom though is that it took over a year and a half for them to be announced. What was the Fed thinking all this time? And what happens if a large bank like BAC is shown to have enormous exposures? They can’t possibly employ the “we were caught off guard” defense this late in the game. A significant capital boost from issuing new shares would be unlikely, there’s zero political will on either side for another direct bailout, what would the remedy be?

  18. ChicagoWill

    Not only could you not repo 28 day Treasury notes, AT&T couldn’t borrow for longer than overnight. For crying out loud, one of the most prodigious cash generating machines could not borrow for longer than one day! Yes, the markets seized up.

    As for the political will to pass Son of TARP, check the votes for the original. More Democrats in the House voted for TARP than Republicans, despite this bill being submitted by a Republican administration. Could Boehner get a majority in the house for Son of TARP? Would McConnell filibuster it? I know where I’d put my money on those two bets.

  19. kevinearick

    Prism: Frames of Reference

    When the model no longer functions, it’s time to build another one, and, depending upon your position on the timeline, it’s probably already done, by the leading event horizon, which is why the lagging horizons make false assumptions about the provision, and why they compete for pie without once making pie, until there is no pie.

    The legacy system makes pie once, sees the ensuing sh**-show, and employs government agency to capture the return coming out of the new leading horizon, until the latter “disappears” again. The intermediaries, having never made pie, naturally accept the “reality” of government as presented. Who is going to turn down free, except the leading event horizon, which is distilled in the process, with Family Law?

    Have you ever wondered why a woman repeatedly hooks up with an abuser or a man with a bimbo (to employ stupid-simple stereotypes)? The former(s) actually create the latter(s), due to the self-fulfilling bias of the prophesy/voices in their head. From aliens, they grow up inured to the model, a bubble in their head, seeing only that which they were told to see, replication. Bullies beget bullies, whether they are physical or passive-aggressive. Follow the path of bullies if you want to map the black hole.

    From the perspective of the electron, it is the proton that is excited (not that either really exists). Not only is energy neither created nor destroyed, but it is also an allusion. There is only separation into charge, through refraction. The string, the multiplexer, the stepping stone, the sun, and the fusion/fission reactor are all one and the same, the perception of which depends upon the location of the perceiver on the resulting timeline.

    No matter where/when you are, you are at a point, which becomes a circle, which becomes a vortex, limited only by the perception “rules” that you have willingly accepted as fact, to short the vortex into easily “manageable” reality, a frame of reference. Once you have accepted a destination as the goal, life is no longer an adventure, and you must increasingly accept false assumptions, and force them upon those surrounding you, to maintain the illusion of the false reality.

    Colors do not actually exist. They are frames of reference on the timeline, a refraction of reality. From the perception of the electron, the proton becomes increasingly excited, trying to prove the false assumption of time, until it implodes into a black hole, creating time. The proton decelerates until there is no time. From the perspective of the proton, the electron exists beyond sight. Parties A, B, and C are frames of reference.

    The trick to getting out of prisoners (prism’s) dilemma is realizing that you may move the frame of reference at will, at the individual, local, state, federal, and global level (dominoes). Depending upon the level of chaos and order you are comfortable with. The aggregate is the result of individual decisions grouped into refractions.

    Debt is the result of an accepted frame of reference. Like energy, it is an illusion of the system. Once accepted, it becomes a Ponzi prison. The legacy system, which naturally seeks to avoid change at all cost, wants as much debt as possible, but you actually choose how much it gets.

    The planet and the universe have been playing this game of time much, much longer than the legacy interests. The trick is not to beat the system, but rather to build a new, symbiotic sub-system, which is what the universe needs to continue, to refract, to extend time along the relativity circuit. You never have a resource problem. You always have a circulation problem. Gravity, the spring, does you the favor of storing “energy” to propel you beyond the threshold of the current frame of reference.

    The proton is self-immobilizing. The electron is mobile relative to the proton, normally beyond the latter’s perception. When the proton sees the electron twice, it “thinks” it will capture it on the third cycle. Sometimes you let it, sometimes you don’t, depending upon the amount of gravity required. Build your operating system accordingly.

    The path to hell is sneaky slippery and fast. The path back out is aggravatingly slow and treacherous. The problem with installing an elevator is that the passengers tend to get out, turn, and jump back into the hole, which is why you want to get cash up front, transform it on the way, and have your knife ready, to cut yourself loose. The competition is to pull you in, so the chickens can feed off your carcass. Best to take them up one floor at a time, and close the shaft below as you go.

    When the chickens demand that you make soup from their sh** and you look around to see everyone else doing so, a leap of faith away from your new black hole focal point is the intelligent decision. The black hole feeds on fear, so don’t look back, unless you want it to see you. Like recognizes like.

    1. steelhead23

      Analogies are only useful when they are clear – or even explained. I suspect you had a point, we don’t get it.

  20. Hugh

    Again an ECB intervention to backstop euro-debt is only a single step. By itself, it would only make the world safe for looters. It would not resolve any of the underlying issues, re mecantilist trade patterns, out of control banks, wealth transfers to the rich, and corrupt, unrepresentative political classes.

    If the Fed was interested in insulating American banks, why did it let them write CDS on euro-debt? If the euro goes kerblooey, what happens to all the dollar swaps the Fed has made with the ECB?

  21. Lambert Strether

    If the financial system is a scale-free network, it’s not “more nodes” as such that’s the problem. Rather, it’s the power curve that scale-free networks produce, with a very, very few well-connected “hubs” at the top of the power curve, with massive connections, and then a long tail of many, many nodes that are rapidly and decreasingly connected. The analogy between “hub” in this sense, and “hub” in air transport is exact, since following deregulation, airlines adopted a hub-and-spoke network architecture. And what happens when O’Hare freezes up?

  22. James

    Would that “Black Friday” finally lives up to its name. Would that the whole world shakes off it’s debt peonage in a singular moment of insane rationality and collapse and realizes that what’y’a know, the sun comes up right on time on Saturday the 26th just like always. Aha! moments are most often like that.

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