Panel raises serious issues over TARP stress tests

Somehow this Congressionally appointed panel is much more believable than Geithner. The so-called stress tests have always been a question mark, with many wondering if they were stressful enough or watered down to make life easier for the banks. The big question has been whether the banks could withstand another tough round. Unemployment is very likely to increase in the near term and with credit problems remaining very high the panel’s findings are not comforting news for a program that is already enormously unpopular, secretive (just like Paulson) and flawed. CNBC:

In particular, the report says “unanswered questions” about the details of the tests, make it impossible to “replicate the tests to determine how robust they are or to vary the assumptions to see whether different projections might yield very different results.”

The report also cites potential shortcomings of the assumptions used for the two economic scenarios because of worsening conditions in some cases and the relatively short time frame used in the models, which “may fail to capture substantial risks further out on the horizon.”

The tests, for instance, used worst-case scenario data for economic yardsticks such as the unemployment rate and mortgage delinquencies.

The report notes that the jobless rate is now 9.4 percent, with a 2008 average of 8.5 percent. “If the monthly rate continues to increase during the remainder of this year, it will likely exceed the 2009 average of 8.9 percent assumed under the more adverse scenario,” the authors note.

For this reason and others, the tests should be repeated, as much as necessary, partly because “banks continue to hold large amounts of toxic assets on their books”.

The short term confidence boost from the initial round of tests is going to be much more difficult the next time, if there is a next time. The stress tests still sound too close to the edge for comfort but we won’t really know until later this year whether the gamble worked.

An American in Paris, France. BA in History & Political Science from Ohio State. Provided consulting services to US software startups, launching new business overseas that have both IPO’d and sold to well-known global software companies. Currently launching a new cloud-based startup. Full bio here.

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