Making it up as they go


If that sounds ludicrous to you, trust your instincts. These people really don't know what they're doing, and they're spending hundreds of billions to do it.

In an unusual joint statement, several U.S. agencies tried to clarify the government's goals as they prepare for Wednesday's launch of so-called stress tests, an attempt to measure the ability of large U.S. banks to survive a protracted recession.


The Obama administration announced its stress-test plans several weeks ago but initially provided little information. On Monday, the government issued a 500-word statement that the Fed, the Office of the Comptroller of the Currency and other government officials plan to begin running banks through rigorous tests to measure whether they hold enough of a cushion to continue lending during the downturn.

The federal statement still stopped short of explaining what economic conditions the government would simulate to determine a bank's health. Officials said Monday they will likely consider a series of nightmarish economic scenarios, including drastically lower housing prices, rising unemployment and continued negative growth. They will ask some 20 banks to predict losses for these events against asset classes such as auto loans, mortgages and commercial credits.

According to the government's statement, firms that need capital would be allowed to sell the Treasury convertible preferred shares, which the government can convert to common shares as banks need more common equity. This would improve banks' cushion against losses but would also boost the government's ownership stake.

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This page contains a single entry by Papa-Lu published on February 24, 2009 10:42 PM.

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