George Michael once told me that I've gotta have faith. But if I'm not mistaken, he was talking about matters of the heart, not the health of the nation's banking system.
Confidence is definitely important. Any lack of it in the economy or the banking system can produce nasty side effects: bank runs, falling stock prices, and consumers hoarding money instead of spending it. Worse yet, pessimism like that can feed on itself, creating a self-fulfilling prophecy.
But does this mean that we should blindly put on a happy face when it comes to the banking system?
No stressing out over stress tests!
Some indications suggest that the government is trying to use the age-old Bobby McFerrin strategy: "Don't worry, be happy." Stress tests being conducted at banks such as Bank of America
The New York Times quoted a senior policy official who said "the purpose of this program is to prevent panics, not cause them." That's actually funny, because I figured the purpose of a "stress test" would be to poke and prod the major banks, figuring out who's in good shape and who's still coughing up blood -- not to gather data in support of a predetermined, rosy stamp of approval.
But it looks like the latter may be a better assessment of the government's approach. To many, the stress tests don't appear to include much stress at all in their assumptions. Nouriel Roubini recently wrote:
The FDIC and Treasury used assumptions for the macro variables in 2009 and 2010 [and] both the baseline and more adverse scenarios ... are so optimistic that actual data for 2009 are already worse than the adverse scenario. And for some crucial variables such as the unemployment rate ... current trends show that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009! In other terms, the results of the stress test -- even before they are published -- are not worth the paper they are written on ...
Of course, Roubini's known as "Dr. Doom," so maybe we should expect such a proclamation from him. But he hasn't been alone in suggesting that the banks are in much worse shape than the bulls want to believe. And the fact that we have folks like Dick Bove assuring us that the banks are fine and dandy just emphasizes how opaque the banking balance sheets are, and how important an honest assessment of banking health is.
Even if we throw out the proclamations of guys like Roubini and Mike Mayo, the fact that the government is expressly withholding stress test results because it doesn't want to dampen the recently euphoric mood just makes me wonder more about the intentions behind these tests.
The Wells-Sachs tell
Defenders of the system may retort, "What about Wells Fargo
Not really. As fellow Fool Alex Dumortier pointed out, Wells Fargo's quarter wasn't much of a surprise, although the company might be $50 billion short. Not only have competitors in the banking sector been eliminated, but banks are borrowing at near-zero rates. Also, most investors have known for some time that banks such as Wells and US Bancorp
Goldman is another story altogether. On any given day of the week, it's good to be Goldman, plain and simple. The firm has some of the smartest folks that money (and Goldman's brand cachet) can buy, and it has some pretty unbelievable political connections.
And here's the thing about Goldman's results: 70% of the firm's net revenue for the quarter came from its FICC (fixed income, currency, and commodities) trading group. This tells me that the Goldman folks in that division did an absolutely bang-up job during the quarter. But it doesn't tell me whether other financial companies -- which were never as good as Goldman at this kind of thing in the first place -- could produce similar results. It also doesn't tell me whether bombed-out banking balance sheets, like the one at Citigroup, will continue to melt down.
Survival of the ... everyone?
At this point, I should probably stop being surprised by all of this. The government's actions to date have show more interest in putting a rubber stamp of approval on all of the major U.S. financial institutions, rather than figuring out which need hospice care. Meanwhile, the institutions that got us into this mess by being too big to fail are only getting bigger.
Through the end of this week, we'll get some more data points on the health of the financial system -- JPMorgan reports earnings on Thursday, and GE Capital parent General Electric
If only someone with access to the balance sheets would conduct some sort of test that would examine the health of the banks under various stressful economic scenarios. I dunno, some sort of … "stress test"?
Further financial Foolishness:
Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. You can connect with Matt on Twitter @KoppTheFool. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...