Monday, April 27, 2009

Back (Sort Of)

Macro Man is back, if in a slightly abbreviated form. While he intended to keep a reasonably close eye on things today, Dame Fortune had other plans for him, as he's been without power for most of the day. He's back online, albeit temporarily, which affords him a few moments to survey the investment landscape.

More generally, this space will take a slightly altered shape over the next couple of weeks. Rather than daily long form entries, Macro Man's intention is to deliver more quick-hit, almost stream-of-consciousness posts. This reflects not only his desire not to stay still for the 45 minutes to an hour that it usually takes to compose his morning missive, but also the indifferent nature of the current investment climate. It's been a bloody difficult couple of months for macro punters, and one can only say that so many times before running the risk of repetition.

First on the agenda is a quick question on the stress tests. This is perhaps a naive question, but it's one that your author has not seen clearly elucidated elsewhere. What, exactly, is the purpose of the stress tests?

It seems fairly obvious that they are not intended as a sober measure of how the banking system would fare under conditions of extreme economic stress. If they were, then the scenarios would offer a bit more choice than "Optimistic and Optimistic (Roubini version.)"

So what, then? Political cover to enable payback of the TARP and/or further injection of funds? To make everyone feel wonderful that the banking system is actually in pretty good shape? (Macro Man would normally scoff at this, but after the market action of the last few weeks, he's not so sure.) In a post-FASB, "say whatever you want" world, what possible purpose does this charade have? Macro Man is curious to hear your thoughts.


Anonymous said...

to cheer u up:

This town, is coming like a Brown town
All the shorts have been squeesed out
This place, is coming like a Brown town
Banks won't lend no more
too much flaking on the dealing floor

Do you remember the good old days
Before Gordon Brown?
We bought and sold,
And salescredits soared inna de boomtown

This town, is coming like a ghost town
All the banks have been closed down
Why must the funds trade against themselves?
Government taxing non-doms and expatriates
This place, is coming like a Brown town
No bonus to be found in this country
Can't go on no more
The people getting angry

Macro Man said...

Seeing someone channel Frank puts a smile on my face.

Thinking about Gordon Brown, and seeing how badly the weather has turned, makes me wonder what the hell I'm doing here!

Anonymous said...

Definitely looks like a (not too clever) way to try to restore confidence in banking sistem. Also the leaked outcome (only one bank would need capital - cnbc) if prove right would look like trying to give best outcome possibile compatible with keeping a gleam of credibility.
Rather than the real aim , the clumsiness of these manoevres surprises me: where's teh point of announcing urbi et orbi a white paper, if it turns out to be completely lacking details (again) and based on a unanumously judged too benign scenario?

sick trader

immy said...

My simplistic view is that Geithner & Co. have spent all the cash Congress gave them.

They are impotent and have no firepower left. But they have to appear to do something to maintain confidence. The Stress-Tests are just an arbitrary activity to give the world the impression that they are slowly but surely working daily to solve the crisis.

No one is willing to state the obvious fact that they just do not have the resources. We're just killing time, "kicking the can down the road".

Anonymous said...

it's like communism - to each bank according to their needs. If the bank is insolvent, well, let's help them out and give them more capital.

EJ said...

I can't help but think that these stress tests are akin to putting oil on a rusty gate once the horse has already bolted....great - the gate works better next time....but it doesn't really change anything now, does it ?...


Anonymous said...

Anonymous said...

'they' are trying to induce money out of t-bills/fixed income back into riskier assets

darkcloud said...

MM -

Like your blog. Got it as a "Best" on my own.

In a word - "mirage". What we are seeing really "isn't there". Central banks, governments, financial systems, et al., are all insolvent. But the markets say they are "healthy" (the mirage).

I coined a new term for derivatives yesterday: "Black holes with stretch marks". What do you think?

Derivatives, off-balance sheet - - all part of the mirage.

Thanks for your blog.

Charles Butler said...

The stress tests are mostly to restore confidence in the supervisory system - or at least arouse fruitless polemic one step removed from the problem.

Anonymous said...

Remember all the talk about good banks/bad banks? How it was somehow wrong for the gvnmnt to 'pick' the winners and losers? Thought struck back then that these results, if made public, would allow the markets themselves to sort the wheat from the chaff as it were. Who wouldn't like that? Oh, the looting oligarchs. But still seems possible for it to play out this way, no?

sargon TM said...

It seems obvious that the stress tests are to make the system seem sound. Their target is not the financial markets, but those who find out about the financial markets from broadcast television news, not CNBC, and from local newspapers, not the Financial Times. Why is this important?

The monster under the bed is, "Who owns all those bonds that would be turned into worthless equity if we took Buiter et al.'s advice and pushed the banks into insolvency?" The answer, of course, is the cohort of workers about to retire over the next 15-20 years, through PIMCO, pension funds, etc.

And what will they do if they decide that their pensions won't be paid, or will only be paid in part? They will start saving like the Chinese; that's what everybody does. In doing so they will, I expect, discover that they don't need a lot of the things they currently "need": the 41" plasma television screen, the third car, the McMansion, etc.

Then the part of the economy that depends on extending credit to consumers disappears. We all say here, in effect, that this cannot be avoided, and I agree. But for me at least, it explains the stress tests. I am not the audience, neither are you, neither anybody else in the financial system. The tests' goal is to re-inflate the bubble, which requires the cooperation of ordinary consumers. Then the problem can be handed on to somebody else, which is as close as the current crew can get to victory.

Sargon TM

David Pearson said...

The stress test is either: 1) a PR exercise to boost confidence; or 2) cover for taking out one or two suspect institutions in the fullness of time.

Which one is it? We don't, and can't know, so the real question is, what positions should we take ahead of time?

Well, if 1) is right, the market will see through it soon enough. Short equities. If 2) is right, this is trickier. A take-out of Citi, done right, could actually be a huge confidence booster. "Done right" is the key though. What are the chances? Slim I'd say. Short equities.

Of course, not everything else is equal. But there's the small and growing matter of the Fed losing control of long term interest rates, or perhaps having to do more, much more, to re-assert control. I'd say this is the sleeper issue that trumps the stress test, just because it seems like right now, no one cares -- but they should.

Anonymous said...

We already have quite a few stream of conciousness blogs (ZeroHedge for instance). I think your 1 insightful post per day policy is much better. Please retain that format.

prophets said...

what darkcloud said is accurate.

the point is to create confidence in the system post-TARP cash infusions.

but without publishing the methods used to stress test, i don't know how they expect the market to be more confident about the banks.

the market is basically being asked to look toward the Federal Reserve, who largely screwed up in their regulation of the banks in the first place, to stress test them with the implicit assumption of, "Just Trust Us".

It's absurd.

If confidence is a function of clarity, then publish the data.

Macro Man said...

Anon, when I am back engaging the market twelve hours a day, the longer posts will return. For now, though, I just don't have enough to say to flesh those out on a consistent basis, and my intention is to not stay chained to a desk/screens for the next couple of weeks. I have no intention of trying to replicate ZeroHedge- what they do is very good and frankly I don;t have the energy to write as much as them.

As for the question at hand, I understand the notion behind trying to pull the wool over people's eyes...I just don;t see the point in a post-FASB world. Unless, as Sargon suggests, they are for layman's coinsumption, But even then...what's the point, really?

Anonymous said...

Welcome back - love the blog. I notice all the comments here are negative about the stress tests. They are mainly correct - the problem is all if these observations are reflective of smart guys in the industry then we are wating for the banks to give back the gains we had. Its a crowded trade to be short and it will stay way and painful until something bad happens. Crazy but explains the GC moments u described. My own take is the treasury is buying time because time can only heal this problem. Most of the banks are insolvent if you measure level 3 assets against tangible assets. But that would be too easy to call out....we need some problems in Euroland or something big to knock this rally off. Until then the shorts will be ground tighter....MCM

Lucid said...

The stress test may be based on the Goldilocks PR scenario: not too hot (Don't want to start a doomsday panic), not too cold (don't want to be overtly laughable), but just right ("Things are serious, but we are in control -- assuming enough taxpayer subsidies.)

BlueMonday said...
This comment has been removed by the author.
BlueMonday said...

stress test or not. the banking system, in my view, looks more and more like the internet sector post the dot com crash. You have a clear winners in a winner takes all position and clear losers that will never recover. the (very) tricky part for the fed is that some banks already do very well because they sometimes have very little credible competitors left. despite apparent efforts to save all banks ... clients, HFs know which banks they need and which banks are already history as risk taking entities ....
clearly banks are not all the same here ... maybe this stress test exercise will help all parties see that !

Anonymous said...

I have no insider knowledge, but assuming that the Administration isn't trying to fool itself:

The stress tests were done by the banks on themselves. The banks pronounce themselves fit and the Administration them steps back and lets them try and stand on their own while the regulators keep a close watch.

Then comes nationalization when the banks fail.

If I'm right, watch for the regulators to add lots of high powered staff.

Anonymous said...

The whole idea seems incredibly stupid to me. They can't pass ALL of the banks (people aren't THAT stupid, and several banks ARE insolvent and will need more capital). They can't fail all of the banks for obvious reasons (maybe they would really like to so none of the banks can return the TARP money, and the goverment will maximize control over them), and differentiating between strong and weak banks can't really help confidence (the core of the government's plan - try to restore confidence, andhope that all of the problems just go away).

Anonymous said...

the announcement of the stress test prompted several banks to stop paying dividends, which might have been part of the goal -- i.e. show you are taking steps to help yourself.

it also may be the first step toward a post-lehman world where different institutions are treated differently (v the post-Lehman Paulson plan where all comparably sized institutions were broadly speaking treated the same). almost everyone may pass, but there may be high and low passes so to speak. that is consistent i think with one of David Peason's scenarios

Anonymous said...


I only have ONE you plan on relocating to greener pastures like the Cypriot hedge fund trader mentioned in the Bloomie article on the UK's new tax regime?

Anonymous said...

Welcome back Macro, firstly.

The etiology of the stress tests yields answers after examination. On Feb 10, while I was vacationing, Timmy Terrific barfed up the plan. Many, including myself, got the American Standard flush. As opposed to the royal flush. If you are not an amateur plumber, American Standard is a commode manufacturer. I want to draw an analogy that would compare the test to challenging Sugar Shane Mosley. You have called the man out and now there is no way out, except to admit that Timmy is a terrific shit.

pj said...

It's part of an extended advertising campaign with the ultimate goal of helping the banks raise capital. Goldman has already done a raise in this temporarily more favorable climate. Others will soon.

Larry Summers believes in economic theories of signaling, i.e. you'll have trouble raising capital if you signal you're weak. So if regulators force banks to raise capital, all while their CEOs are protesting that they don't need capital, and if the government itself says that the capital is only needed to cope with an "adverse" scenario in a stress test, not with a "likely" scenario, then there is a minimal signal of weakness.

The timing of the marketing campaign is coordinated with other programs to coincide with the capital raise. We just had the end of mark to market, allowing write-ups of assets in Q1, then in Q2 dumping those assets to the PPIP program, thus transferring $20-50 billion of losses from banks to the Treasury, on top of another $100-200 billion already transferred to the Fed and FDIC (but losses not yet booked by those institutions, the losses are in the form of collateral on non-recourse loans worth much less than the loan amount). The PPIP program may further limit the need for loan loss provisions in Q2, and they will find a way to leak this in May, thus facilitating capital raises.

Unfortunately reality is downgrading the banks as fast as the Treasury can prop them up. The "adverse" scenario of the stress test already looks easier than the actual economy.