Nouriel Roubini: "the results of the stress test are not worth the paper they are written on"

[Better Believe It]

Stress Testing the Stress Test Scenarios: Actual Macro Data Are Already Worse than the More Adverse Scenario for 2009 in the Stress Tests. So the Stress Tests Fail the Basic Criterion of Reality Check Even Before They Are Concluded
by Nouriel Roubini
April 13, 2009


The spin machine about the banks’ stress test is already in full motion; some banking regulators have already leaked to the New York Times the spin that all 19 banks who are subject to the stress test will pass it, i.e. none of them will fail it.

But if you look at the actual data today macro data for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in FDIC baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.

The FDIC and Treasury used assumptions for the macro variables in 2009 and 2010 both the baseline and more adverse scenarios that are so optimistic that actual data for 2009 are already worse than the adverse scenario. And for some crucial variables such as the unemployment rate – that is key to proper estimates of default rates and recovery rates (given default) for residential mortgages, commercial mortgages, credit cards, auto loans, student loans and other banks loans – current trend show that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009! In other terms, the results of the stress test – even before they are published – are not worth the paper they are written on as they make assumptions on the economy that are much more optimistic –even in the worst scenarios that the FDIC has designed - than the actual figures for Q1 of 2009.

Please read the complete article at:

http://www.rgemonitor.com/blog/roubini/256382/stress_testing_the_stress_test_scenarios_actual_macro_data_are_already_worse_than_the_more_adverse_scenario_for_2009_in_the_stress_tests_so_the_stress_tests_fail_the_basic_criterion_of_reality_check_even_before_they_are_concluded

[xchrom]

1. recommend

[Extend a Hand]

2. tip: add pirates to the title so people will see this important thread

(here's a K&R but unfortunately this post will probably get lost in the great DU pirate wars)

[Bigmack]

5. The Wall Street pirates...

make a the Somali pirates look like pussies.

But, like you say, most people are distracted by shiny objects waved in front of them.

[truedelphi]

7. Heh. Heh.

ON M$M it is all pirates, all the time.

And Obama successfully stopped the pirates. I knew it was all locked up for our side when they sent Johnny Depp in as the negotiator!

[Hawkowl]

3. USA! USA!

Can we get some SEAL snipers down in the high rises on Wall Street to take out a few more pirates?

[Delphinus]

19. That's an idea!

}(

[indimuse]

21. lol!

THAT... and.. well...ALL of FAUX News (NOT so Newz) station's satellites..etc..! HA!

[chill_wind]

4. Surprise, surprise, surprise.

K & R.

[Name removed]

6. Deleted sub-thread

Sub-thread removed by moderator. Click here to review the message board rules.

[Political Heretic]

8. It's all just a bunch of bullshit.

:(

[NJmaverick]

13. Yes it is. Yet some people feel if you shovel it high enough they can call it a mountain.

[Thrill]

9. I don't know if he's right or not. But how can he have any idea whats going on with the banks

If he hasn't seen the books. How can he criticize what the Treasury has yet to even release?

I respect Roubini. But I think he gets a hard on from being Mr. Doom and Gloom.

[girl gone mad]

10. He explained in the article.

It's pretty clear and concise if you take the 5 minutes required to read it.

[Kurt_and_Hunter]

14. If you read the thing you'd know it isn't about the banks

It is about the stress test.

The "adverse economic scenario" that is the basis for the stress test is public information.

[Better Believe It]

Didn't read the article, did ya?

[ProSense]

11. "Actual Macro Data Are Already Worse than the More Adverse Scenario for 2009 in the Stress Tests."

Interesting. So the charge is that reality is worse than the worse case scenario?

Good, at least there will be a basis for comparison when the actual data is released.

[notesdev]

12. Details, charts, etc.

If anyone wants hard numbers, go check 'em out at Calculated Risk:

http://www.calculatedriskblog.com/2009/04/roubini-and-stress-test-scenarios.html

[PBS Poll-435]

15. After Thursday's Gains...

Today 4-13-08

Citigroup (C) up 25% to $3.80

Bank of America Corp (BAC) up 15.39% to $11.02

Wells Fargo & Company (WFC) up 0.31% to $19.67

JPMorgan Chase & Company (JPM) up 2.9% to $33.70

USBankcorp (USB) up 2.10% to $18.01


Combined PBS Poll-435 BigFive Index - 86.2, up 129%!! from the 3/6/09 low of 37.52

[Kurt_and_Hunter]

16. If irony were in your arsenal you'd see how surprisingly relevant your reply is

Yes, the stock price of banks has gone up a lot... and the fact that the stress test is a joke (the subject of the OP) is a supporting factor in that move.

The reason financials have been leading the rally is that an existential threat of effective oversight was removed. They know that the Obama administration has taken any sort of non-voluntary bank clean-up method off the table. That removes substantial risk from holders of bank common stock.

And if you equate the prospects of the American people with the prospects of common-share holders of the largest financial institutions then your logic is impeccable.

[PBS Poll-435]

17. Diversified 401(k)s/IRAs and other retirement vehicles require healthy stock prices

When I look at retirement-age Americans (that's a lot of people!) and the prospects for solvency in traditional City/County/State pensions, I can directly tie the common-stock share prices to the greater-good of Americans as a whole.

[LittleBlue]

18. Stress test = sham. What a shocker.

Didn't see that one coming.

[slipslidingaway]

20. kick n/t

[JoseGaspar]

22. This is not rocket science.

What Roubini is saying is not even controversial. He is saying that the "stress tests" for bank viability are based on a set of assumptions or projections, about what is going to happen with the economy. This is equally true of the Stimulus Plan and several of the Fed programs. He is further saying that those projections (primarily coming from the Treasury) range from optimistic to pessimistic. Finally, he is saying that the actual economic data, AT THE BEGINNING OF 2009, is already worse (and in some cases, far worse) than is projected in the most pessimistic Treasury projections. The worst indicators are also the most important: unemployment, GDP and consumer spending.

The undeniable conclusion is that the programs in question (bank bailout, Stimulus, and several others) will fall short. How short will be determined by what happens in the next few quarters. All the happy talk in the world will still change nothing.