Sunday, April 05, 2009

Stress Test Update: Regulator Meeting Planned

by Calculated Risk on 4/05/2009 05:02:00 PM

UPDATE: A reader notes:

One more point worth making - Results of the stress tests, especially if they show potential capital shortage, surely constitute a reportable material event and therefore must be publicly disclosed to the SEC to protect the shareholders, who are likely to be diluted.

It is not just the matter of public trust and fairness, it is the SEC law.
The WSJ has an update: Bank Stress Test Meeting Planned. A few points:

Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country's 19 largest banks ... The Federal Reserve is overseeing the stress-test analysis process. People familiar with the matter said the final analysis isn't likely to be completed until at least the end of the month.
The end of April was the original schedule, FAQ:
Q10: When will the process be completed?

A: The Federal supervisory agencies will conclude their work as soon as possible, but no later than the end of April.
A suggestion for regulators: Ignore the "baseline case" - it is inoperative.

On the differences between assets with the same characteristics:
"[All loan portfolios, even with the same surface characteristics, don't perform the same at all." [said Eugene Ludwig, chief executive of Promontory Financial Group, which advises financial firms]
This is an understatement. Last April, Ambac discussed a Bear Stearns deal:
"Ambac originally projected that losses on the underlying collateral of the Bear Stearns transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral ..."
This is part of the problem in valuing assets - assets with identical characteristics may have significantly different losses. If it was securitized by Bear Stearns, or the loans were originated by New Century (and others), I'd be especially careful.

And on transparency:
"I think serious efforts will be made to respect the confidential nature of the test and its results," [Ludwig] said, but added that "there is a real danger that the results of the stress test are uncovered and this roils the markets."
The results of the stress test should be made public - at least for any bank taking TARP money. This would build confidence in the process, otherwise serious doubts will remain.