"Nobody Makes It"

Fascinating piece from Bloomberg on the little-understood "stress tests." According to Bloomberg:

"Regulators are using two economic scenarios for the tests. The first is a 'baseline' forecast of 8.4 percent unemployment and 2 percent economic contraction in 2009, followed by 2.1 percent economic growth and an 8.8 percent jobless rate in 2010. The other is a 'more adverse' scenario, with 8.9 percent unemployment and 3.3 percent contraction in 2009, followed by a 10.3 percent jobless rate and 0.5 percent growth in 2010."


Trouble is, the unemployment rate is already exceeding the "more adverse" scenario. Indeed, according to Calculated Risk "the baseline case is no longer useful...the more adverse case is the new baseline."

So if the "more adverse scenario" plays out again--and that's certainly a possibility--the banks are going to be in deep, deep trouble.

How bad is it going to be? Here's Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia:

“The bottom line is if the unemployment rate peaks at 10 percent these banks can make it through. But if it peaks closer to 12 percent, nobody makes it. Or very few people make it.”

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    Well Ethan (5.00 / 2) (#1)
    by Catch 22 on Mon Apr 13, 2009 at 08:58:55 PM EST
    forget the banks. We better pray for Americans sake that unemployment doesn't reach 12% because if it does a whole lot of people don't make it!

    Why obsess about banks when there are little guys to consider? I might be asking as a blogger what the almost $800B stimulus is doing for the economy instead of banks banks banks 24/7. Just my view.

    If we didn't have to commit (5.00 / 1) (#15)
    by Jlvngstn on Tue Apr 14, 2009 at 08:44:28 AM EST
    a trillion over to the banks, a trillion over the last 5 years to Iraq, perhaps we might be in a better position to fund an appropriate stimulus.  

    As it stands, the stimulus is too small relative to job creation which of course perpetuates constricting consumption.  Lack of job creation also creates slow pay and fall behind in mortgages. The slow pays, constricting consumption of course creates more layofs and cycle repeats itself until we have cut deep enough to force China to cease currency manipulation.

    I agree with most of your comments relative to wages and over blaming the banks entirely, but really if Obama were committing a trillion dollars to put solar panels on every gov't bldg would the right be behind it?  Would you?

    I would be because it would create jobs and job creation encourages consumption and consumption means job creation and GDP growth and people actually having income to pay their mortgages.

    Instead.  We are choking the economy sending money to the banks and ceding job loss to 10%, this year.  

    I hope the market continues to climb, I will be shorting just about everything come July or August as I don't think it wise to be around in October.  Thinking the funding of the banks will right the ship is no more accurate than thinking a trillion dollars outfitting gov't bldgs with solar panels.  Neither really "work" but both provide something.  One is tangible the other not so much so.

    In any event, we will squeeze China and its currency which to me is a great thing.


    "coddling the greediest amongst us" (5.00 / 2) (#3)
    by blogtopus on Mon Apr 13, 2009 at 09:52:57 PM EST
    NealB, I was talking to my conservative brother in law, who doesn't think we should be supporting a bunch of lazy poor people. I now have my answer.

    It's a lot cheaper to support a bunch of lazy poor people than a few lazy rich people, and it saves lives, too.

    For those Reagan Democrats reading, that means we could have bought every single African American man, woman and child living under the poverty line a Cadillac CTS (8.1 Million at last census) with 5.2 Million Caddys left over. NOW who are the Welfare Queens?

    Think of all the mortgages that could have been (5.00 / 2) (#4)
    by nycstray on Mon Apr 13, 2009 at 10:09:29 PM EST
    paid off . . . .

    Not praying for banks... (5.00 / 2) (#6)
    by Ethan Brown on Mon Apr 13, 2009 at 10:59:53 PM EST
    just pointing out that the 'more adverse' scenario is likely...

    also worrying that the Geithner approach--a denial that banks are basically insolvent, throwing billions at toxic assets, etc.--is making the 'more adverse' scenario increasingly likely.

    Good point, as unemployment in CA (none / 0) (#7)
    by oculus on Mon Apr 13, 2009 at 11:20:03 PM EST
    and some other states is already well over 10%.

    New Oregon unemployment numbers (5.00 / 1) (#8)
    by caseyOR on Mon Apr 13, 2009 at 11:32:36 PM EST
    were announced today. We now stand at 12.1 % unemployment. Last month Michigan's was 12%. Will they regain the lead when numbers for all 50 states come out at the end of the week? Or will Oregon overtake Michigan as the #1 unemployment state?

    Things here are grim. Amazingly, even though Oregon has been in the top 5 for unemployment for awhile now, people are still moving here looking for work.


    Simple Solution (none / 0) (#9)
    by Socraticsilence on Tue Apr 14, 2009 at 01:51:11 AM EST
    Quit being so damn progressive and beautiful- our unemployment in Montana is much lower, of course were hardly inhabitable 5 months out of the year.

    Highest unemployment (none / 0) (#10)
    by caseyOR on Tue Apr 14, 2009 at 02:02:35 AM EST
    in Oregon since WW II. Actually, it ties the 1982 rate which, I guess, makes it a tie for worst since the war. Anyway, it is bad and getting worse. The entire west coast is in serious trouble.

    By the way, Montana is beautiful. Years and years ago, when I played rugby, my team would travel to Kalispell to play the local women's team. An amazing place.


    Hardly inhabitable by sissies! (none / 0) (#25)
    by Militarytracy on Sat Apr 18, 2009 at 08:05:52 AM EST
    I still have much of what it takes to enjoy a winter that hits 20 below.  I can't seem to discard any of it so it sits in storage, I wonder if I have a subconscious plan to escape the bible belt or something?

    Like People (none / 0) (#12)
    by cal1942 on Tue Apr 14, 2009 at 07:01:37 AM EST
    heading for California in the 30s.

    So is LA again going to send (5.00 / 1) (#16)
    by Cream City on Tue Apr 14, 2009 at 09:19:25 AM EST
    agents to the state border to tell Okies to turn back?

    Goldman Sachs' profit done with smoke and mirrors (5.00 / 1) (#19)
    by caseyOR on Tue Apr 14, 2009 at 10:08:47 AM EST
    This morning Goldman Sachs held a conference call with journalists. That amazing first quarter profit Goldman trumpeted yesterday is built on shifting sand. Floyd Norris at NY Times blogged the call They conveniently "lost" December.

    The Wells Fargo profit appears to be kinda fake, too. So,, someone, please explain to me again why we must keep these over-compensated bankers around? What value exactly is their knowledge of the system providing? Other than the ability to continue lying and cheating.

    We don't have to keep them... (none / 0) (#22)
    by kdog on Tue Apr 14, 2009 at 01:39:40 PM EST
    we certainly don't need them, they're a drain...the problem is we can't get rid of them because they are the government...we blinked and missed the coup...its by, of, and for the masters of the universe now man...think fuedal system.

    So, the question is, can all of us... (none / 0) (#2)
    by NealB on Mon Apr 13, 2009 at 09:02:50 PM EST
    ...who don't 'make it,' make it? I can make it, according to what I know, through the end of this year, luck-stays-with-us. After that, my friend, who loved Obama for all the wrong reasons, won't give a damn anymore about anything he ever believed in ever in his life. Two years ago we thought we were doing fairly well. I'm almost to the point where Mitt Romney could convince me that Obama just FAILED. He believed the wrong lies and ruined the nation. All the suffering he will have caused.

    The banks must be socialized immediately. Their time as robber barons is long past over. Too many tens of millions of us have already paid our dues for too many years to wait any longer for coddling the greediest amongst us.  They're an abomination.

    Why socialize? (none / 0) (#18)
    by kdog on Tue Apr 14, 2009 at 09:21:48 AM EST
    Why not just let the banks that failed close?

    I'd be no more inclined to use a socialized bank than a private one...shady business is shady business, no matter who owns the joint.


    Deposit guarantees (none / 0) (#20)
    by cenobite on Tue Apr 14, 2009 at 11:53:16 AM EST
    FDIC insures bank deposits. This means when a bank "fails" the FDIC steps in and takes over the bank. The assets of the bank are sold and used to pay off the depositors, but if they don't cover it, the FDIC makes up the difference.

    Some of these banks are so large that the FDIC insurance fund isn't sufficient to pay off the depositors. If FDIC goes bankrupt, there will be a general run on all US banks.

    It's probably cheaper for the government to actually operate failed banks for long enough to do an orderly receivership and sell off profitable units, since the FDIC has to be backed up anyway.


    I think the banksters need more money!!!!!! (none / 0) (#5)
    by lambert on Mon Apr 13, 2009 at 10:41:47 PM EST
    Doesn't everyone?

    Then this ought (none / 0) (#13)
    by cal1942 on Tue Apr 14, 2009 at 07:15:03 AM EST
    to be of some interest, no pun intended.

    I especially like the part about raising fees and credit card interest rates to make up for their losses on bad loans.  Bad loans that they made in an attempt to make even higher profits.

    Hell of a plan; take public money and then charge the public more money.


    Yep, "a simple plan" (5.00 / 1) (#21)
    by lambert on Tue Apr 14, 2009 at 01:27:41 PM EST
    And it's even better than that -- charge the public fees for taking their own money.

    Morning coffee along with reality (none / 0) (#11)
    by Militarytracy on Tue Apr 14, 2009 at 06:36:46 AM EST
    Well, at least we know what the stress tests are made up of.  I can't find anyone talking contraction numbers as I skim the surface out there that I even find credible, but I haven't had much of a chance to really dig in and around and won't have one until next week.  The time to have really turned this around and only ended up with a recession has long passed.  Insolvent banks needed to have had done to them what the law required to have done, and the laws are there for a reason and the primary one is what we learned from the depression.  I suppose it would still benefit us all greatly if it were done today but that isn't going to happen either.

    Actually, from what I have been (5.00 / 1) (#14)
    by inclusiveheart on Tue Apr 14, 2009 at 08:35:58 AM EST
    reading - and based on Elizabeth Warren's comments - we don't really know much about what the stress tests are made up of.  We know a few details like the unemployment percentages, but these models are far more complex than that and have include many more markers than that.  Warren says that it is impossible to evaluate independently whether or not Treasury's assessment of the state of the banks is actually accurate because she doesn't have her model.

    And... this will make you happy - I read that the models that Treasury asked the bank to use their own models - the ones that they've been using all along - the same models that didn't predict their weaknesses that we are seeing now.  Of course, there is no way for anyone to verify this since Treasury won't share the models with anyone.  

    It's all good!  /s


    About that "transparency" promise (5.00 / 1) (#17)
    by Cream City on Tue Apr 14, 2009 at 09:20:43 AM EST
    in this administration -- did Obama mention it to Geithner?

    My last girlfriend was a model (none / 0) (#23)
    by lambert on Tue Apr 14, 2009 at 01:46:02 PM EST
    [rimshot, laughter]

    Too lazy to find the link, but I remember in recent travels through the econoblogs finding the idea that the models were very sensitive to unemployment (which makes sense, because that's one driver of foreclosure) and that the worst case scenarios for unemployment in the models were in fact, the new reality and hence the baseline.

    Anyhow, we got where we are because of models the managers built to achieve the outcomes they were incentivized to achieve -- garbage in, bonuses out. So, in the absence of transparency, there's no reason to trust the models -- in fact, every reason to DIStrust them, since if the models are legit, why not open them to view?


    Good Lord Cripes (none / 0) (#24)
    by Militarytracy on Sat Apr 18, 2009 at 08:02:21 AM EST
    Thanks for the input.  I won't be able to catch up with anything yet until Monday at the earliest.  Getting to use the "old" models (and how was it that those models were even considered a model?)......why would that even be an option unless it was the only way they could make it appear that some banks could survive a spring shower.