Tuesday, May 05, 2009

Bank Stress Test Results Released

US Treasury Department Recommendation: Economic growth must be lifted slightly (but not too much) to validate bank balance sheet solvency

What a pleasant surprise to read an interview with President Obama this weekend which contained the following:

What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade. That I think will change. And so part of that has to do with the effects of regulation that will inhibit some of the massive leveraging and the massive risk-taking that had become so common.

Now, in some ways, I think it’s important to understand that some of that wealth was illusory in the first place

If he could just share this view with Mr. Geithner and Mr. Bernanke who, according to the WSJ, have a different view: the news [of the stress tests] sparked concern among investors and depositors that the results would be used to shut down or nationalize some of the country's weaker institutions. But Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner assured investors that none of the banks undergoing stress tests would be allowed to fail and that all would have access to government funds if needed.

If, as President Obama argues, some of the wealth created by the financial sector was illusory, financial sector profits need to shrink relative to the rest of the corporate sector and leverage in the sector must be reduced, why won't banks be allowed to fail?

For how much longer will the economy be the tail wagged by the financial sector dog- a tail, mind you, which can only wag in ever smaller amplitudes to avoid overturning that dog? If the Auto sector was viewed as the Financial sector is the response to their troubles would have been a $20K stimulus check such that each family could buy a new car.