Saturday, February 28, 2009

Stress-Test Ambiguity

We are told by the Government that federal Regulators are in the midst of applying a series of "stress-tests" to major US financial institutions. These tests will purportedly measure a Bank's ability to withstand a continued deterioration of economic conditions. On a positive note, it appears that the Government has come to understand the concept that not all capital is created equal, and will be focusing on Tangible Common Equity as a determinant of overall health. Unfortunately, the Government has neglected another more important concept, one that the Market has demanded continually since the onset of the Crisis. The concept we refer to is transparency, specifically with respect to the Rules of the game.

The Government has failed to provide any guidance as to what will constitute a passing grade under the parameters of the "stress test". Clearly, this ambiguity is by design. Were the Government to release a comprehensive set of parameters for Bank health assessment, the Market would very quickly be able to distinguish between the winners and the losers. However, this outcome is highly unacceptable to the Government for a very simple reason: Control. The Government, emboldened by its new found clout over corporate America, will accept nothing other than full Control over the situation.

Now, we would like to point out that no sooner had the Government dispersed the first tranche of TARP money than reports emerged that cronyism and favoritism had influenced the selection of particular Bank's for receipt of TARP funding. This, we believe, will continue to be the name of the game, a requirement for continuance of said game being a lack of transparency regarding the true financial health of institutions. We may, however, be incorrect. Sphere: Related Content

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