About Those Stress Tests...
The Market Ticker - Commentary on The Capital Markets
Logging in or registering will improve your experience here
Main Navigation
Sarah's Resources You Should See
Full-Text Search & Archives
Legal Disclaimer

The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. For investment, legal or other professional advice specific to your situation contact a licensed professional in your jurisdiction.


The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.

The Market Ticker content may be sent unmodified to lawmakers via print or electronic means or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media, to republish full articles, or for any commercial use (which includes any site where advertising is displayed.)

Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.

Considering sending spam? Read this first.

2009-11-06 10:17 by Karl Denninger
in Banking System Ignore this thread
About Those Stress Tests...

I said at the time they were nowhere near "stressful" enough in their "more adverse" scenario.

I was right.

Here's the table (thanks to Northwoodspete for pulling and posting it on the forum)

How about a bit of reality?

Real GDP looks to be a fairly decent guess on "more adverse", but the problem is unemployment.  The "average" estimate for 2009 was 8.4%, the "more adverse" was 8.9. 

But we are now at 10.2, and that's the "headline" number, not including the "disgruntled" or "not in labor force" folks.

The entire premise was that we would turn the corner on or before now, with the usual "lagging indicator" factor on the headline unemployment number.

That hasn't happened, as I reproduce again in this chart:

The turn upward in this chart was a near-exact correlation with the end of the recession in the early part of the decade.  Not only are we dramatically worse now, we haven't even begun to turn, and those who have exited the labor force continues to skyrocket.

The key item here is loan losses. 

They will not begin to stabilize until year-over-year job loss turns.

The Treasury "stress tests" did not envision this outcome.  I said at the time they were nowhere near pessimistic enough and did not demand enough capital be raised (probably because they couldn't.) 

But one of the premises of modeling outcomes is that your "worst case" scenario has to be worse than the expected range of outcomes.  That clearly has not happened, and leaves open the question of whether the banks that were pronounced "safe" really are.

I'd argue that based on the stress tests and actual economic performance the answer is a resounding NO!