I am reviewing the White Paper the Fed just released:

“All U.S. bank holding companies with year-end 2008 assets exceeding $100 billion were required to participate in the assessment, which began February 25. These institutions collectively hold two-thirds of the assets and more than half the loans in the U.S. banking system.”

One thing struck me right away — unless I am misunderstanding something, this stress test does not appear to be very stressful.

Consider the following baseline and “Stressed” components:


Further, let me point out that the Consensus estimates, professional forecasters and blue chip surveys have all been awful — terribly wrong — during this entire fiasco. Using their wildly optimistic estimates impugns this entire process. When your marriage is on the rocks, you don’t ask the same jamoke who introduced you to your spouse for marital advice. (Let me hasten to add that I am happily married and this is just a visceral example).

Using the Q4 as the starting point, have a look at the charts:>



The baseline GDP scenario starts from Q4, then adds an additional  modest contraction for the baseline, and a less modest deeper contraction for the “more adverse” test, i.e., a modest worsening of the economy.

None of these reflect another deep set of contractions — and they certianly do not reflect the sort of panic economy we saw from September 2008 til January of this year.

The bottom line is that for a stress test, these weren’t very stressful . .  .


The Supervisory Capital Assessment Program: Design Summary (287 KB PDF)
Board of Governors of the Federal Reserve System, April 24, 2009


Category: Bailouts, Credit, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

175 Responses to “Stress Test: Not Very Stressful”

  1. call me ahab says:

    the “stress test” will prove what – exactly? If it is an honest assessment- great- if not- then they better lay out all the data so the market can make up its own mind

  2. dead hobo says:

    The alternative more adverse assumptions look more realistic for 2010 than the others, by far. What’s going to happen between now and the end of the year that will make 2010 look so good?

  3. franklin411 says:


    The Economic Recovery and Reinvestment Act?

    The Federal Reserve announced that it would print another $1 trillion in cash?

  4. Peter Boockvar says:

    While there is a lot of wording on the Fed’s test assumptions, here are the plain #’s that has been used to determine two scenarios, a ‘baseline’ scenario and an ‘alternative more adverse.’ For ’09, the average baseline GDP estimate is -2% and for ’10 its +2.1%. The adverse case is -3.3% for ’09 and +.05% for ’10. The baseline assumption for ’09 unemployment is 8.4% and 8.8% in ’10 and the adverse scenario is 8.9% for ’09 and 10.3% for ’10. For house prices, the baseline case is a 14% drop for ’09 and 4% for ’10 and the more adverse case is a decline of 22% for ’09 and 7% for ’10. I quibble with their estimate that 10.3% unemployment is adverse as I believe a higher rate is more likely than just ‘adverse.’ The drop in home prices in the adverse scenario, if looking at Case Shiller, would imply a 43% peak to trough fall thru ’09, which is definitely adverse. With this out, bank analysts can figure out who needs what.

  5. leftback says:

    @Franklin: The $1T isn’t going to go anywhere except inside Mr Dimon and Mr Lewis’ vaults….

    For unemployment to decline there would have to be job creation and that is just not going to happen.
    Stay in school. For another 4-5 years. Trust me, I did in the 1980s. You get to like Ramen after a while.

  6. Transor Z says:

    So what does it say if we end up with major institutions that can’t even pass a watered-down “adverse” scenario? Will anyone be surprised?

    If you stop to think about it, they failed the real-life stress of RE prices actually dropping for any length of time.

  7. call me ahab says:

    what’s a trillion- trillion here, trillion there- big f*cking deal- it’s only paper

  8. bdg123 says:

    There is some stress but I would argue how much and the types are not necessarily accurate. Nor are they reflective of a reality that we are going to see muted growth for a long time given many policy decisions. ie, The stress test should be over the next five years at a minimum. This looks like a modern-day stroll in Central Park. ie, Not reflective of reality because the police started cracking down on homeless people and mentally-challenged and have run them out of the park. So, all looks comparatively normal. ie, Push the undesirables to the side and all looks marvelous.

  9. DL says:

    ahab @ 2:44

    Seems to be the prevailing attitude.

  10. franklin411 says:

    That’s the brilliance of it…All of those kids hiding in college are going to need faculty to teach them!

    And gold is just a yellow rock, and the difference between a person considered “ugly” and one considered “hot” is the strategic placement of body tissues.

    The more I think about it, the more brilliant the stress test becomes. Geithner really hit one out of the park here. Think about it:

    TARP was a program that was created when the government had a gun to its head. The banks came to the government and said “give us cash today or we’ll explode by tomorrow morning.” Treasury and the Congress had to give them the money on trust alone. That isn’t going to happen again.

    Armed with the stress test, you can go to Congress and say “Bank XYZ is in dire straits and needs $$. We know because we looked at the books and determined that if unemployment got to A and housing dropped B%, they would be in trouble. Therefore, give us money.” Politically, it’s a lot easier for Congress to approve funding a known quantity based on *some* research.

  11. bman says:

    I say we start with waterboarding, Let’s see how long the banks can survive when they’re under water.
    Also, let’s infest their main offices with cockroaches. We could deprive them of sleep for long periods of time, and remove all their clothes and blankets. (suicide hazard) Let’s see where’s that other memo?

  12. Andy Tabbo says:

    I can almost feel the tension out there between bulls and bears as we near 875. 871 is big number for me. I’m short and will be one of many traders stopping out above 876. Nervous….

  13. dead hobo says:

    Andy Tabbo Says:
    April 24th, 2009 at 3:03 pm

    I can almost feel the tension out there between bulls and bears as we near 875. 871 is big number for me. I’m short and will be one of many traders stopping out above 876.

    If longs try to catch a falling knife, what do shorts do? Nothing personal, as you appear to be doing it.

  14. leftback says:

    “If longs try to catch a falling knife, what do shorts do?”

    Climb over a barbed wire fence using your balls as support.

  15. Mannwich says:

    TGIF. That’s all I’m going to say. Thank God this circus is closed on the weekends.

  16. leftback says:

    “I can almost feel the tension out there between bulls and bears as we near 875″

    That’s why you play the game, Andy.

  17. call me ahab says:


    I’m no gold bug by any means- also

    I am starting to think you have an “inferiority comlex”- you constantly bring up comments that relate to a person’s outward appearance- and when you say a “strategic placement of body tissues” well- what can I say to that- people are attracted to what they are attracted to- I mean really if I had to chose between Mother Teresa and Jessica Biel . . . well you get my drift

  18. 1.5quadrillion says:

    What EVERYONE has missed in commenting on the Fed’s white paper is that the stress tests are based on a survey of data that was completed BY THE BANKS THEMSELVES. (do you see the data sheets at the back of the white paper?)

    THERE WAS NOT INDEPENDENT AUDIT OF THE INFORMATION!@!!!!!!!@!@!!@@! “Supervisors” of the process looked at the submissions! They looked at them and then overlooked them!

    Page 6:
    “The BHCs were asked to estimate their potential losses on loans, securities, and trading positions, as well as pre‐provision net revenue (PPNR) and the resources available from the allowance for loan and lease losses (ALLL) under two alternative macroeconomic scenarios.”

    Doesn’t anyone actually READ anymore?

  19. Andy Tabbo says:

    dead hobo. As technician, if a market violates one’s target resistance or support, one simply stops himself out with a small loss and lives to fight another day. Some other trader adages….

    “It’s OK to catch a falling knife, as long as you catch it by the handle.”

    Of course the #1 rule of trading is and always will be: “Cut your losses your short. Ride your winners.”

  20. arcticpup says:

    Shouldn’t the stress test use really terrible growth numbers to test stress… as there shouldn’t be any problems with GDP increasing… but negative growth… and really bad unemployment… that’s stress.

  21. Mannwich says:

    Me-thinks I need to give myself a stress test…….

  22. call me ahab says:

    well . . . upside down on my QID- haven’t sold though- 1300 shares stabbing me in the heart- I will live to fight another day

  23. Phil Izzo says:

    List of 19 Banks Undergoing Stress Tests
    Posted by WSJ Staff

    The government confirmed the following list of the 19 banks undergoing stress tests:

    JP Morgan Chase & Co.


    Bank of America Corp.

    Wells Fargo & Co.

    Goldman Sachs Group

    Morgan Stanley


    PNC Financial Services Group

    US Bancorp

    Bank of NY Mellon Corp.

    SunTrust Banks Inc.

    State Street Corp.

    Capital One Financial Corp.

    BB&T Corp.

    Regions Financial Corp.

    American Express Co.

    Fifth Third Bancorp



  24. HCF says:

    > Me-thinks I need to give myself a stress test…….

    My stress test tonight? How many bottles of wine to open with dinner…


  25. leftback says:

    This is all bs. Most of the banks are insolvent and we know it. This was a smokescreen for the public.
    Sooner or later someone is going to issue common or come back to Congress with cap in hand.

    In our alternative universe, the XLF zooms to 1000, President Blankfein leads the Unity Party to power.
    Franklin becomes the new President of Harvard and Tiny Tim wins the Nobel Prize for Economics.
    To celebrate they go to PF Chang’s and then Chipotle Mexican Grill to pick up chicks.
    Nothing makes sense any more.

  26. Mannwich says:

    @HCF: I’m out of all booze in my house. My wife doesn’t generally drink, so I usually don’t keep much around the house (no fun drinking alone). Might want to stock up tonight on a little wine and something a bit “harder”…….drinking alone might be fun tonight out on the deck!

  27. Whammer says:

    HCF — bet the over ;-)

  28. Whammer says:

    @leftback, the Chipotle comment has me LOL.

  29. DL says:

    Leftback @ 3:36

    “Franklin becomes the new President of Harvard and …”


    An excellent choice.

  30. Mannwich says:

    The new U.S. economy = propped up banks and the feds.

    Everyone else is on their own. All is well though. People don’t need jobs on Main Street when they can just buy PF Changs & Steak & Shake stock from each other. That’s the new bubble.

  31. DL says:

    FAZ @ $8.

    Anyone tempted?

  32. greg says:


    When I drink alone, I like to be by myself.

  33. HCF says:

    @ Mannwich:

    Might I suggest a twenty year port from any major producer: Sandeman’s, Dow’s, Graham’s or other. The beauty of it is that port was designed specifically to withstand traveling by sea in open casks. So you can pop a bottle open and drink it over the course of weeks or months (or minutes if your trading has gone horribly wrong!). At least in these parts, it’ll run you maybe $30 a bottle and last awhile as long as you aren’t a lush. Happy Friday!


  34. Mannwich says:

    Yes. Probably snagging some (gulp) at the close and going to the bathroom to throw up.

  35. There once was a test named Stress
    In which bankers were urged to guess
    Just how large is this mess
    It was all done in jest
    In order to rape Joe 6 the best.

  36. call me ahab says:


    what about the “old maxim”- never add to a losing postion

  37. Andy Tabbo says:

    Gotta love the nature of markets…..rallying into the weekend with a G-7 meetings….analysis of “stress tests” coming and the market is heading into an intraday “double” top type look. The weekly S&p500 now looks like a wicked “hanging man” doji. I’m pulling all the stop losses I have. I’m going to have to be short over the weekend. Good Luck everyone.

    Love those banks….yeah….they’re real strong now that they’ve had a stress test….

  38. karen says:

    Wait for FAZ sub 4… Foghorn, you outdid yourself; a standing ovation for you.

  39. Bruce in Tn says:

    Well, Manny, it appears you can’t keep a good bond down…


    So, if you’ve bought 7 billion of this with our money this week, and rates, cuss them, just won’t go down, I suppose we’ve just bought the gift that keeps on giving…

  40. Mannwich says:

    @karen: Thanks. I think I’ll wait a bit and continue to accumulate more powder for that “all-in” moment. It seems we’re not there yet. Now I’m off to Steak & Shake to keep their earnings up. Have a good weekend all.

  41. karen says:

    Andy, the top isn’t high enough.. maybe if we can hit spx 875-877. But seriously, this is 7 weeks in a row up… i think i’ll go back to 2007 and see if we had any 8 week ups…

  42. Mannwich says:

    Anyone know the weekly consecutive market gains record? Are we even close to it at 7 weeks in a row now? Anyone?

  43. HCF says:

    > Anyone tempted?

    Yes, bought some at $8.13 and already wishing I had held out for better… At this point, I’m thinking “I fought the law and the law won”


    ALWAYS take the over when it comes to alcohol…


  44. leftback says:

    When fundies and technicals combine to give the same message, you have to go with your gut.
    It’s kitchen sink time. Nothing ventured, nothing gained.

    CJ: Are you listening. KITCHEN SINK on the short side. Is that clear enough???

  45. phb says:

    Please ‘splain to me how this is any different than the former USSR or communist China reporting of economic data? This is exactly why private investors are loosing faith in the capital markets and going private with investing. Ridiculous! This republic was nice while it lasted…

  46. DL says:

    Trading volume on FAZ is 4.4 times normal; volume on FAS only 1.6 times normal. Someone’s getting shaken out.

  47. Mannwich says:

    Fading a bit here. Harbinger of things to come next week?

  48. Mannwich says:

    Picked up some SDS and QID.

  49. Thanx Karen
    Blind squirrel

  50. dead hobo says:

    To a large part, I think technical levels are substantially ritualized superstition. However, since so many others believe in Zeus, it doesn’t hurt to buy into it.

    DL, if you have a reasonable holding period, FAZ at 8 is a sure thing. Since you are dealing with 1/2 a parabola, the closer you get to the axis, the more inelastic your downside becomes and the more elastic your upside becomes. At the top, it is dangerous to hold since you can lose really fast. That being said, the fools and their masters are in control now and you might have to hold a while. At this level, tight stops will work. At higher levels, they won’t.

  51. DL says:

    Mannwich @ 3:51

    I don’t know. But you’ve got to distinguish between bear market rallies and “bull” ones. (No pun intended). We’re already on the 2nd longest bear one since 1933.

  52. Mannwich says:

    Let the dumping commence!

  53. DL says:

    DH @ 3:56

    Hey, you said it was a sure thing at $9. I want my money back.

  54. Mannwich says:

    Wow, what a ride today! TGIF.

  55. Mannwich says:

    Nice pump at the end. Where are my BP pills? Might need two today.

  56. karen says:

    Today’s weekly spx candle is now red… so that’s 6 up weeks, 1 down, and a possible set up for an 8th up. Basically, i think we are strung out till Monday : ) Gotta luv this market. LOL.

  57. dead hobo says:


    when reality returns, the S&P falls 100+ points and FAZ rises 100%+, can I have 1/2?

  58. call me ahab says:

    if this market goes up one more week- I am going to have to kill someone- serious rage issue at the moment

  59. leftback says:

    A slight balding figure at the back of the theatre gave a hand signal, and one by one, the smart money began to leave the building. “Evening, Mr Blankfein” said one taller man, as he passed. “Don’t forget to yell FIRE when you get outside, Mr Mack” said Blankfein, and he smiled.

  60. Mannwich says:

    @ahab: LOL. I’m only laughing because I know how it feels. Just have to laugh at the absurdity of it all. Hang in there.

  61. DL says:

    ahab @ 4:02

    Actually, the S&P closed lower today than last Friday’s close.

  62. Mannwich says:

    @DL: Oh, so that means we can see gains next week and this market will be deemed “totally natural”.

  63. call me ahab says:


    a scant 3 points

  64. Mannwich says:

    Kind of wish I had some grabbed some FAZ in the high 7′s. I’ll probably change my mind on that one and feel good about holding off by Monday morning though.

  65. karen says:

    My recommendation for dinner this evening is a bountiful, organic arugula* salad and at least one bottle of wine per person. Try Educated Guess from the Roots Run Deep Winery. http://www.rootsrundeep.com/

    *an aphrodisiac, also loaded with potassium

  66. call me ahab says:


    what about the old maxim- “never add to a losing postion”

    do you think it matters when dealing with ETF’s? Or only applicable to a particular stock?

  67. Onlooker from Troy says:

    I won’t touch the leveraged ETFs. I’m not a short term trader and won’t hop in and out. If you hold these things they’ll eat you alive. That said I have some SPY puts (Jun and Sep), SH, and short IYR (tried to add today and there are no shares to borrow, what a surprise).

  68. call me ahab says:


    I can get a 12 pack of PBR for $6- that’s 50 cents a can- I’m feeling poor right now

  69. lerwin says:

    Wouldn’t it be a lot easier to just look at prices of the banks’ bonds and credit default swaps? Assign an arbitrary number (like the banks do with when using our FICO scores!) and be done with it. That way there’s no finagling of the numbers, no idiotic interpretations of the rules.

    It’s a lot easier to grade a true/false test than an essay.

  70. DL says:

    call me ahab @ 4:14


    You into S&M…?

  71. Ahab
    At least go for Pearl.

  72. call me ahab says:


    I know- I try to get in and out with the 2x ETF’s and try to hold for no more than a day- have had the QID since Wednesday unfortunately – haven’t braved the 3x

  73. call me ahab says:

    Foghorn- not a bad idea- however, don’t live in Texas

  74. danm says:

    For the market to drop, it looks like we’re going to need a surprise. Any thoughts?

  75. kittyboy says:

    So is today’s news effectively the death knell for SKF?

    I did well last time with SKF, selling near the top at 260. Bought back in at 90 and now it’s under 60.

    Even if the banks are insolvent does today’s news, “Fed says gov’t ready to save stress-tested banks” mean it’s time to cut my losses with SKF?

  76. Bruce in Tn says:


    No, I didn’t vote for him. What in the hell was wrong with me?

  77. danm
    Patience is a virtue, think top of second, o outs

    Didn’t realize Pearl was a regional
    Only tried it ONCE

    If anybody has any real cash at risk in THIS market,
    you better have brass ones.

  78. Watching says:

    DL Says:
    April 24th, 2009 at 3:56 pm

    Mannwich @ 3:51

    I don’t know. But you’ve got to distinguish between bear market rallies and “bull” ones. (No pun intended). We’re already on the 2nd longest bear one since 1933.

    We’ve had so much “innovative” financing that I wouldn’t be surprised if this is turns out to be the longest bear market rally ever.

  79. Watching says:

    Then again, both daily and weekly SPX look like we’re going to start heading down.

  80. leftback says:

    danm: “For the market to drop, it looks like we’re going to need a surprise. Any thoughts?”

    The market might well BE the surprise. Insider selling is sending a message.

    I don’t hold the ETFs for long. I look for a good set-up and have an entry and exit level.
    Right now if the market breaks decisively above SPX 875 I would cut my losses and wait for another entry.

  81. call me ahab says:

    Watching Says:

    “We’ve had so much “innovative” financing that I wouldn’t be surprised if this is turns out to be the longest bear market rally ever.”

    undoubtedly- the market seems to shrug off accounting manipulation and outright bullshit coming from the banks and administration

  82. DL says:

    Headline on CNN money:

    “Georgia bank failure marks the 26th of 2009. First four months of the year have seen more failures than all of 2008″.

    Maybe that explains the rally today. Bad new is apparently good news.

  83. DL says:

    leftback @ 4:48

    Yeah, a decisive close above 875 would cause me to push the panic button.

  84. Mannwich says:

    I am getting worried this fantasyland b.s. can go on far longer than I have the stomach for, but I have a feeling that once things quiet down a bit (after the bullshit stress test announcement and earnings season) will be precisely when it all falls apart again. Absence of garbage manipulation and happy talk and unease (possibly leading to panic) will set in again when people realize things are still getting worse, albeit more slowly.

  85. cjcpa says:

    got it.
    late, but got it.

    maybe I add on monday.

    gotta get the baby….. literally.


  86. Watching says:

    Picked up more FAZ at 8.06 – holding through the weekend. I’m pretty sure that we’ll gap down on monday, even if the MMs manage to rally later.

  87. wally says:

    It is an attempt to manage expectations by people who now realize they cannot manage reality. This whole show has made one thing pretty clear: Geithner, Summers and Obama do not have deep political skills. The old pros try to avoid getting into situations where people laugh at them.

  88. Wally
    The old pros try to avoid getting into situations where people laugh at them.

    Think about this folks.

  89. DL says:

    It’s worth taking another look at the (chart of the) rally of 7/23/08 – 8/29/08. The market went absolutely nowhere for a month. May be happening again.

  90. цитируем…

    bank holding companies with year-end 2008 assets exceeding $100 billion were required to[...]…

  91. DiggidyDan says:

    This rally reminds me of 2 things. . . 1. the slide at the fair i used to careen down on a burlap sack when i was a little kid that had a hump in the middle that caused people to bounce up and bruise their ass when they landed in the middle of the last drop to the end. 2. the scene in Braveheart when they are all lined up with giant pikes hidden ready to take out the cavalry “steady, hold, Hold, Hold, HOLD! . . . NOOOOOWWWW! http://www.youtube.com/watch?v=30XsH-tZtBY&feature=related Now just don’t wait too long!

  92. leftback says:

    7/23/08 – 8/29/08. I remember, I should have just played golf.

  93. rktbrkr says:

    This stress test is a kabuki show – all 19 banks have been guaranteed perpetual life today – just so we don’t get stressed awaiting the results. I guess Congressional approval is foregone since TARPI is almost gone and nobody knows how much all this will cost.

  94. Onlooker from Troy says:

    >>Wally says:
    The old pros try to avoid getting into situations where people laugh at them.<<<

    You mean like this:



  95. call me ahab says:

    @ DL-

    I think that is a huge possibilty- however when you have AT talking about an upside Doji star (I don’t even know what that is) and leftback saying load up- then you have to wonder- I see the big picture- much harder for me to see the nuances of short term trades

  96. call me ahab says:

    rktbrkr Says:

    “This stress test is a kabuki show – all 19 banks have been guaranteed perpetual life today”

    the only hitch with that- as much as Geithner would like to think that he can continue to provide capital indefinitely- is that I really do think there would be a firestorm over the Treasury asking for any more money from congress for the banks- and I think they realize that- that is why they are talking about converting preferred to common, etc.- I just can’t see another request getting through congress

  97. DL says:

    ahab – -

    What happened after 8/28/08 was pure nirvana for the bears. (I can dream, right?)

  98. kittyboy says:

    I’d love to hear anybody’s 2cents on SKF…

  99. DL says:


    What doesn’t kill you, makes you stronger.

  100. Marcus Aurelius says:


    Oy. Glad we don’t do that silly shit here.

    I hate when I’m late to the Friday night party, ’cause everybody’s already burnt out and the bong water is dirty.

    Anyone who doesn’t think we’ll pay for these lies, is fooling themselves. The truth will out, as it always does, and when it does, there will be exponentially increased hell to pay. I’m ready, and I’ll stay ready. Hope y’all are, too.