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Zero Hedge on the Stress Tests

Zero Hedge, a fantastic blog that I’ve only recently discovered, has some interesting comments on the Stress Tests that were recently conducted on the 19 US banks.

1) “more than 150 senior supervisors, on-site examiners, analysts and economists” spent a month reviewing the 19 BHC’s that hold two thirds of the country’s bank assets and account for one half of the loans

More than 150 means at least 151. Is the US Iceland or something? Ten trillion dollars in assets and five hundred trillion dollars in derivatives in one month? A typical single bank examination utilizes hundreds of examiners and takes several months. Clearly the next release of public sector productivity numbers is going to astonish.

(2) ”the firms were asked to project…..the firms were asked to provide…etc.”

In other words, the banks tested themselves and the 150 examiners took their word for it. Any wonder they passed?

(3) “traditional role of capital, especially common equity, is to absorb unexpected losses and thus to protect depositors and other creditors. ”

Well, it used to be. Now that job has been outsourced to the US Taxpayer.

(4) “As a result of the loss recognition framework for assets in the accrual loan book, the results of this exercise are not comparable with those that would evaluate such assets on a mark-to-market basis”.

Absolutely. What does the market know anyway? The banks’ models got us into this calamity so damn if they can’t get us out!

(5) “The SCAP analysis is forward looking, but over a limited time horizon. Losses and resources are projected over a two-year period (2009 to 2010) …”

Apparently Treasury is absolutely certain that the crisis they never saw coming will be over soon and in no way is today like 1930. Great news!

(6) “Each participating firm was instructed to project potential losses on its loan, investment, and trading securities portfolios, including off-balance sheet commitments and contingent liabilities and exposures over the two-year horizon beginning with year-end 2008 financial statement data. “

Again, Treasury outsourced the testing to the banks themselves. So what was the job of the Treasury staff other than to photocopy , collate and file? Was this a Temp Staff? Kelly Girls?

(7) “Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate. ”

I know it looks bad, but believe me, it’s getting better!

(8) Chart Page 9

Under the baseline case the economy stops its downward acceleration in Q3 2009. In the so-called adverse case this occurs in…Q3 2009.

(10) “Under the baseline scenario, BHCs were instructed to assume no further losses beyond current marks”

It’s over! Great news!

(11) “For other consumer loans and for commercial lending (including various types of commercial real estate lending), the agencies estimated loss rates using techniques such as regressions of historical charge-off or default data against macroeconomic variables such as home price appreciation “

I know there are some modelers out there. How does one reasonably construct a regression analysis on past data when nothing similar has ever happened?

(12) “Supervisors evaluated firm loss estimates using a Monte Carlo simulation that projected a distribution of losses by examining potential dispersion around central probabilities of default.”

Ah…smells like Gaussian distributions. The old standard. We have seen how well that assumption works in these unusual times. An example of the dependability of using Gauss, taken from stock market movements in October, and calculated by Nassim Nicholas Taleb of Black Swan fame, showed that the price movements seen in October 2008 could be expected to occur—using estimates based on Gaussian distributions—once every 73,000,000,000,000,000,000,000 years. For those of you not tied to Biblical strict constructionism, the Universe is around 18,500,000,000 years old. Looks like it will be a few quintillion years before we see October again.

(13) Appendix

Take a good look at just how complex and thorough this “test” was. An online dating questionnaire is more probing.

It’s unbelievable. Anyone who tells me the U.S. is transparent, and “clean”, and capitalist, or whatever, deserves a whack on the posterior. But, at least they’re honest people out there commenting on the blatant lying and fogging that’s going on out there. (In this part of the world, news about the bad stuff is the problems, not the bad stuff)

This is one of those times when you can’t say it’s bad, because it gets worse. You have to ask yourself, if we’re standing on such bloody thin ice, is it worth imagining it’s thicker and therefore, not moving? If these banks die, is it the end of the world? It can’t be. It’s never been. By denying them death, the smaller banks of the world, the smarter, well capitalised blokes, are losing out; capitalism feeds the second rung when the first rung dies, and the first rung is on eternal life support.

Maybe the right thing to do is to boycott these banks anyway. Take out all the uninsured money (>100,000) and put it in different, better capitalised banks. Should help in cutting off life support, at least.

  • GG says:

    >I’ll tell you better way – take all your money out of the banks and buy Gold with it. This will collapse the current corrupt regime of fiat monies.

    The real problem and the reason behind the present crisis is the regime of irredeemable currency. Stability from world currencies was abandoned in 1971 when the US defaulted on it’s Gold obligations and we went to a “floating” exchange rate system, but in reality all currencies of the world have been sinking together – in terms of purchasing power since then. All governments since then have embarked on stealth campaigns to loot their people via massive inflation. I strongly encourage you to read essays by Prof. Antal E. Fekete (Google it!) to understand the real reasons behind this worldwide mess and what are the possible outcomes. Our present day so-called “economists” are complete idiots and beholden to powers-that-be controlling the monetary spigots. Ever wonder how/why the Gold went from about Rs.180/10 gms Gold to about 15000 today? This just tells you how much the Govt. has stolen from everybody who has been storing their wealth in fiat monies all these years.

  • Siddharth says:

    Excellent find mate.

    If govt can steal in terms of fiat then it CAN and SHALL the physical gold if you own, when the time comes! American history part II?

    good luck.

  • shaq says:

    >i read somewhere in paper about you presenting in the barcamp…will be helpful if you could mail slides from the same..

  • Anonymous says:


    I saw one of your post on NIFTY earnings. Is it possible to post a link for the source of the earnings data. You said its taken from NSE website. Tried searching NSE website but could not locate anything related to agreegate earnings.

    Request you to post the link for nse earnings related data.

    Appreciate your reply


  • Deepak Shenoy says:

    >GG: Interesting idea, but won’t that just increase the price of gold? Plus, the world doesn’t have enough gold for all the money we (supposedly) own. ALso after the great depression private gold ownership was banned.

    Shaq: Which one? The last barcamp I presented was in Mumbai but I used no slides then.

    Dave: Nifty earnings are Nifty Value divided by Nifty P/E. In the NSE site go to Index/Statistics, Scroll down to the place where it allows you to ask for historical values and P/E.

  • shaq says:

    >i now remember the article was in DARE magazine …and i thought there were some slides…but it was a good insight whatever was mentioned about…thank you

  • Mr.Candid says:

    >Well, Tyler Durden would be brave enough to comment about the problem in US. Is it possible for you to write openly about our stock mkt operator, our former FM, who on Jan23,2008 said that FIIs are buying equities as if he has seen the surveliance of NSE. You must acknowledge the fact that India is much more worser than USA. If some one says about some company suddenly you’d be finished. No one comment about merger of RIL and RPL. If RIL is earning Rs.100, why its not giving dividend of Rs.20 to its shareholders. If you look into lot of companies it would be only like that. Why would a software company need 200 acres of land to build 20 acres. Because it could use the remaining acres as an asset and could show in its b/s which could possibly lift the price orelse promoters could use it for their real estate business.

  • Anonymous says:

    >Thanks Deepak

    Is there any web site which can give me past & future earnings estimates for NIFTY


  • Deepak Shenoy says:

    >Mr. Candid: I doubt there’s real evidence of that stuff. RIL/RPL – what’s wrong with that merger? It was fated to happen, right from the start. RIL dividend, well, you could say that of Buffett as well.

    The land stuff etc. happens in the US as well, not just in India. That’s not so much a scandal, though it’s a lousy deal for the people around.

    We have our share of issues, but at this point, our folks can actually say: Look, the US is hiding it…

  • GG says:


    Well, we only have two options don’t we – either sit still and let the Govt. pillage us or do something about it. Why do you think there was such a huge black market in Gold before import was freely allowed (since ’91)? Smart people were still holding their wealth in Gold. That’s why black markets develop. The more the Govt. interferes with the free market, the more black markets develop. As hard as the Govt. tries to thwart the market, people will still find ways to get around it. Even in the US, not everybody surrendered their Gold in 1930. You just have to let go of the idea that the Government is all powerful. If enough people take action, the Govt. will have to bend. The present time presents such an opportunity, IMHO.


    That’s a common misconception. There is enough Gold for everybody, just the price has to be right! Based upon my research (although you may not believe it) Gold is in a major bull market which will take the price to the stratosphere 9its still undervalued). I would even venture to say that the present crisis is, in fact, Gold crisis. I would like to point you to an essay by none other than Alan Greenspan (which will also illustrate how absolute power corrupts absolutely):

    Gold was and is money. Read the history of how our present day fiat money regime evolved. Even now we have quasi Gold backed dollar via the Gold derivatives market. The central bankers know that Gold is money which is why they hold it as a monetary asset and why China just doubled it’s reserves. They also know that the moment Gold is unavailable in exchange for fiat money, at that point it will become worthless. Gold is long and complicated subject and unfortunately our “leaders” have tried to completely erase all knowledge about monetary science as much as possible. However, there are excellent resources available on the internet and I encourage you to research it.

  • GG says:

    >It appears that many people think that it is absolutely necessary for everybody to follow whatever the Govt. says. No! This is the flaw of our education system – a process for creating obedient zombies rather than independent and free thinking people. Gold confiscation in 1930 in US was a robbery of the American people – plain and simple. The power to print money is the ultimate power, and Governments all over the world has usurped it. Is it any surprise we see so much corruption all over the world today. Like they say – absolute power corrupts absolutely. It is time that the function of monetary supply was returned to the free market via Gold. This is the reason why the founders of America prescribed that only Gold and silver could be money because they knew first hand from their experience in Britain and Europe how Central Banks can destroy a country and curtail freedoms – which was subverted in 1913 with the creation of Federal Reserve – yes, stealthily and unconstitutionally. Central Banking originated in Britain, and I encourage you to explore how it came about and its role in the present crisis. Like they say, those who don’t know history are destined to repeat it – like we all are doing now. My prediction is we’ll see hyperinflation for sure 2-3 years down the line. Throughout history, all pure fiat regimes have failed – ALL. Not one has survived and this time will be no different, but will be more painful because all countries are on a fiat money standard. Wonder why currencies have started gyrating wildly these days – the regime is in it’s death throes. I have written an article explaining briefly what I think the reasons behind the present crisis are. You can read it here:

  • Nooyawka says:

    >Isn’t Zero Hedge great? I discovered him about 2 weeks before you did, have commented on the blog a couple of times. Great reading…sometimes stupifyingly technical.

    You seem to hold the naive belief that the US is capitalist. We in the US have the sense that capitalism is disappearing. The present market problems are, to a large extent, due to various forms of government interference in the market (forcing institutions to make bad mortgages, for one). The Obama administration is quite hostile to what is left of capitalism. It wants to turn the US economy into a version of European socialism. Many people here despair that capitalism is dying and the present government is happily putting the last nails into its coffin.

    Are your readers who believe in Gold serious? Gold is histoire. Gold was good as a hedge when communication took days. In times of trouble, buy gold because you won’t know what is safe for a few days. But in the computer/internet era decisions can be made in moments, not days. For instance, one can move money from one country to another, or one class of assets to another, in seconds. Gold is irrelevant. It doesn’t rise and fall in synch with any market or any needs or any reason. It has value only to people who think like historic figures in the past. Dress your ladies in gold, don’t invest in it.

  • Deepak Shenoy says:

    >Nooyawka: yes, fabulous blog, that.

    Yes, US capitalism is sorta dying, but it’s not quite Euro socialism (hey, sweden did better). Even India is quite socialist, and managed to nationalize most its banks in a fell swoop about 37 years ago. We still have Left parties that want the government to be involved in every business.

    I am ambivalent about gold, and yes, in a connected world it has little value greater than other paper instruments. But in a world without trust – it might be interesting.

  • Siddharth says:


    I love gold. And more than that silver. Good opportunities for black market in PM in India. But what about govt interference in the capital market? How does it develope black market there? Nowhere to hide than PM! But how long?

    Its very bad situation and Deepak has been suggesting we might not have seen the worst yet! I dont believe end of the world is coming anytime soon. Now the World market has become BIG enough to let FAIL. haha. Love that terminology.

    Good luck.

  • chimak says:

    >deepak what the …… even u r getting in the doomsdayer wagon.

    I read huge amount of data which has no use to me……but to read this kindda of zero hedge and sensatational shit like this on u r blog.

    plz read this…….

    do read the comments section too.

    i will tell u upfront……that i can’t make head or tails about the CDO and vdo and whatnot…..and all this things but still………

    same with the the big picture blog…..this guys are spinning all the newsin in negative tone. Like the us gdp number how they spinned it…… the comments in the blog u will get what i am saying.
    That guy barry spins big time.

  • Deepak Shenoy says:

    >Chimak: That link you sent? That very link talks about how “respected” Barry at the Big Picture is.

    I don’t think Zero hedge is a bad blog – that there are problems, he mentions appropriately, and most of it is opinion, which is what even my blog is.

    I don’t think we should ignore bad news. A lot of stuff is likely to be significantly worse than it seems!