Roubini says government rigged "stress tests" to let banks pass

If trillions in taxpayer bailouts didn’t convince you our government is doing the bidding of bankrupt megabanks, here’s more proof. Economist (and predictor of our current financial crisis) Nouriel Roubini says the government’s so-called bank “stress tests” are rigged to let obviously sick banks pass. The “really bad” economic conditions in the “stress tests” are better than current economic conditions:

Macro data for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in FDIC baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.

The FDIC and Treasury used assumptions for the macro variables in 2009 and 2010 both the baseline and more adverse scenarios that are so optimistic that actual data for 2009 are already worse than the adverse scenario. And for some crucial variables such as the unemployment rate – that is key to proper estimates of default rates and recovery rates (given default) for residential mortgages, commercial mortgages, credit cards, auto loans, student loans and other banks loans – current trend show that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009! In other terms, the results of the stress test – even before they are published – are not worth the paper they are written on as they make assumptions on the economy that are much more optimistic –even in the worst scenarios that the FDIC has designed – than the actual figures for Q1 of 2009.

Ironically, this same sort of wishful thinking — “House prices will NEVER fall, so we’ll lend 100% (or even more) of any house’s value to anyone, no matter that they have no income to make payments” — created the housing market bubble! We’re now recycling this “logic” to keep alive zombie banks, which George Soros fears may “suck the lifeblood of the American economy.”

Posted by James on Monday, April 13, 2009