Just Use the Good Numbers: Stress Test Fiasco

Ok, I know I have been hard on banks, but just read this piece below from the Wall Street Journal.

One question mark hanging over the tests is whether they will be perceived as tough enough. From the start, some economists and bank analysts argued that the Fed’s worst-case economic scenario was overly rosy. Since the Fed informed banks of the preliminary test results, the government appears to have softened somewhat as banks pushed back.

Among other things, regulators accepted banks’ bullish arguments about their profit outlooks. The Fed initially planned to use banks’ lackluster 2008 revenues as a jumping-off point to predict future incomes, according to people familiar with the matter. But many big banks logged robust first-quarter profits and argued that should serve as the “run rate” for the stress-test period.

Any bank needing more capital will have until June 8 to develop a plan and Nov. 9 to implement it. The banks must also review their management and assure regulators that leadership has “sufficient expertise and ability,” to manage through the current environment.

Read the whole article here.

So, just trust the trumped up earnings from first quarter and extrapolate from there. I will keep my short positions for now, thank you.