Obama's Bank Stress Test: Government Plot or Apophenia

Earlier this year, Tim Giethner presented a plan on how the administration is going to "fix" the banking system by subjecting the country's 19 biggest banks to a series of dire what-if scenarios that assume ballooning unemployment and further GDP contraction: the Stress Test

The Treasury Department's end game is to weed out banks that need more capital and to give Americans more transparency and accountability in the banking system. That would separate the weak from the strong and put the latter group of banks in the position to repay money they got under the Troubled Asset Relief Program (TARP).

The consensus has been that banks for the most part won't need more capital, with a few exceptions.

The banks whose balance sheets look the weakest under those scenarios will have six months to raise new capital. If they can't, they can convert their TARP preferred investment into common shares or raise new capital from the government under stringent terms.

Over the last week, I have heard many arguments and viewpoints on the Stress Test. Some argue that because much of the results in this test would remain 'hidden" from public view, it defeats the purpose of the transparency and accountability goal of the stress test. Many arguments have been made stating that the test is not only useless, but may do more harm than good.

But has anyone ever considered the Stress Test as a government tactic to gain further ownership and control of the US banks in order to form Obama's new democratic government?

Let's face it, the US government is known for using wordplay, distraction and diversion tactics to gain trust and then unleash its hidden agenda.

Just think about it.

In order to pass the Stress Test, banks will have to clear the hurdle of a three per cent tangible common equity (a measure of financial strength that divides the value of outstanding stock by assets).

Based on the tangible common equity (TCE) to risk-weighted assets in the first quarter, the stress-test banks that have already reported their profits should clear the 3% hurdle.

But here's the problem. The government's stress test is based on an assumption that unemployment will peak at 10%. Under these circumstances, it appears that most of the banks under this test should past.

Given recent numbers however, and based on the forecasts by many different analysts, the unemployment rate could very well reach past 10% and grow to as high as 12% from now until the end of 2010. Under these numbers, many of the banks, including Bank of America, Wells Fargo, BB&T, PNC Financial, SunTrust Banks, Regions Financial, Capital One and U.S. Bancorp may not pass the 3% TCE.

They basically have two simple choices if they don't pass, both of which ultimately give the government a bigger stake in the US banks:

1) Convert their TARP preferred investment into common shares

Or

2) Receive new capital from the government

Citigroup, for example, has chosen door number one and in doing so will give the government a 36% stake. Keep in mind the administration has said that no bank will "fail" the test; those with big holes that need filling will have them filled at government expense.

So here we have a test from the government to weed out the bad banks, yet no bank under this test will fail. So if no one fails, what is the point of having a test?

It looks to me like the government is using the stress test as an excuse to gain further ownership of the big banks and thus begins their movement toward further control and ownership under Obama's democratic government.

So is the Stress Test an act to raise accountability and trust from the banks or Obama's government plot to gain further control and stake for his democratic government?

Call it apophenia, but I choose the latter.
Best regards,

Ivan Lo
Equedia Network Corporation