Stressing over Stress Tests

What is the current state of the finance industry in this country?   The results of the bank "stress tests" for the top 19 banks (by asset value) are seen by many independent analysts to be unconvincing.  Last week, the Federal Reserve stated that the vast majority were sufficiently capitalized to withstand an even greater economic downturn than the one we are currently experiencing.  Yet, this week, Bank of America and Citibank (with almost $4 Trillion in assets, combined) were told to each raise over $70 Billion in capital.  High unemployment rates are not going away anytime soon and an economic recovery is not likely to be seen until the beginning of next year even under the rosiest of circumstances.  What will happen to BofA and Citi in the meantime?

John Browne, Sr. Strategist at EuroPacific Capital had this to say:

"First, the level of stress in the tests was set unrealistically low. Their absolute worst case assumption was for a GDP contraction of only 3.3 percent in 2009. This comes as first quarter 2009 GDP shrank at 6.1 percent. And the economy is still slowing. To post a contraction of just 3.3 percent for the year would likely involve an immediate reversal in the rate of contraction and outright expansion by the fourth quarter.

The stress test also assumes a worst case scenario unemployment rate of 8.9 percent in 2009. This is also wildly optimistic when unemployment is already at 8.7 percent and rising at some 20,000 each day. Worse still, if calculated on a pre-Clinton basis, to include all those unable to find anything but part-time employment, the current unemployment rate is a staggering 19.2 percent, or just 0.8 percent from official depression levels! It appears that the U.S. is fast slipping from recession into depression, rendering the stress tests almost meaningless other than as a public morale boosting exercise." 

More on this here.