Failed your test? No problem, you’re saved anyway

Full story here. I’m a rage-aholic! I’m full of rage-ahol! Didn’t we already learn this lesson a long time ago when they “socially promoted” kids who did poorly in schools– because they’d have poor self-esteem if they didn’t get to move up– only to find later that they prevented the rest of the class from doing as well and still failed to catch up.

See, I KNEW that the “stress test” was a load of crap just by the methodology, but it’s even more disheartening to hear that once the scabby hides of festering banks were exposed to the light of day, all were pronounced beauty queens just the same. Seems it would cause a panic if the less desirables were left standing with no investors. Heaven forbid.

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“The Federal Reserve on Friday said the government is prepared to rescue any of the banks that underwent “stress tests” and were deemed vulnerable if the recession worsened sharply. The Fed, in outlining the tests’ methodology, said the 19 companies that hold one-half of the loans in the U.S. banking system won’t be allowed to fail — even if they fared poorly on the stress tests.

The Fed reinforced its view that major financial firms are “too big to fail,” and the government must do whatever is necessary to save them, said former Fed examiner Mark Williams.

“It appears ‘too big to fail’ is a fundamental philosophy — it’s a philosophical principle,” said Williams, a finance professor at Boston University.

Critics say that policy has put taxpayer money at risk on behalf of banks that have received billions in government bailouts and guarantees.

Separately Friday, bank executives were being briefed on their test results in meetings across the country. By law, the banks cannot publicize the results without the government’s permission, but Wall Street buzzed with anticipation and most financial stocks rose. The Dow Jones industrial average added more than 119 points to 8,076.29.

The Fed release contained little new or concrete information. But Fed officials said in a conference call with reporters that banks will be required to keep an extra capital buffer in case losses continue to mount.

The tests were designed to gauge how banks would fare during a much worse recession than most economists expect. But the Fed said that a bank needing more capital to cushion against loan losses under its “adverse” economic scenario should not be considered insolvent.

Rather, such a bank — if it could not raise additional money from private investors — could get financing from the Treasury’s bailout fund.

Even if the tests showed a bank needs more capital, that “is not a measure of the current solvency or viability of the firm,” the Fed said in a description of the tests’ methodology.

Battling the worst financial crisis since the 1930s, the government has committed more than $11 trillion in loans, investments and other measures to prop up troubled institutions and stabilize the banking system.

For months, officials have put off questions about the banking system by saying they’re awaiting the stress-test results.

The delays have led investors to fret: If the tests show every bank to be strong, they will look like a whitewash and won’t be taken seriously. Yet once investors can distinguish stronger from weaker banks, they could start selling off weaker banks that remain stable but might falter if the recession got much worse.

The banks will have a few days to review the government’s stress tests results and appeal any findings they disagree with. Regulators will give them the final results next Friday, according to two people familiar with the matter who spoke on condition of anonymity because they were not authorized to discuss it publicly.

In a conference call with journalists, senior Fed officials said regulators will be keeping a close eye on banks to make sure they have adequate capital to withstand likely losses on mortgages and other assets as the recession drags on.”

My bit again: “the government has committed more than $11 trillion in loans, investments and other measures to prop up troubled institutions and stabilize the banking system”. Correct me if I’m wrong, but the entire mortgage sector comes up to about $15 trillion, right? And credit cards is about $9 trillion. So the gov’t has pledged to cover nearly 46% of the major outstanding debt (11/(15+9)) for everyone in the country. But I notice that my debts have not gone down the equivalent 46%, or even 10%. In fact, I’ve had credit cards with no balance have their available credit cut by 50% in some cases. Remember that meme about “cramdowns rewarding stupid mortgage consumers are evil”? Umm, so now we have a situation where we have to pay for this future financing of $11 trillion AND the poor shnooks who are underwater on their mortgages are still waaaay on the hook for it, ‘cos that seems totally fair. Enjoy your cup of rage-ahol.

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