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  1. Wealth
May 8, 2009

Stress test? No stress

By Spear's

Geithner has stress-tested the US banks? He might as well as have tried swatting flies with a rubber band.

So Tim Geithner has stress-tested the US banks? He might as well as have tried swatting flies in his office of Treasurer with a rubber band: these tests were to see if the flies could stand on their core capital legs until the end of 2010.

So the office of his predecessor who couldn’t see this crisis coming has been testing the directors and their balance sheets of banks who not only couldn’t see the crisis coming but actually created it over several years without apparently realising it, and then went blindly on buying up other banks that were already bust after the crisis had well and truly broken.

And this collection of great seers can already see the end of 2010 and everything that’s going to happen in-between? William Hill wouldn’t give you very good odds on that one.

So what were the assumptions behind this extraordinary exercise in Homeric prophecy? Unemployment and house prices, that’s what! (Up between 8.8 and 10.3%, and down between 14.0 and 22.0%, respectively, in case you wanted to know.)

How you do the arithmetic to join this range of outcomes to the actual assets of the Bank of the Tuesday Lunchtime Adventists is beyond me, and I suspect well beyond the realm of the manageable and the possible. It sounds like Black Box time at LTCM, if you can remember that far back. As I said, Tim Nice But Dim might as well have stayed in his office and knocked over some flies with his rubber band.

Take for instance the imminent demise of GM: can he see how many jobs will be lost as a result? (In Brum in Blighty, 850 metal bashers at LDV make vans, but if they had gone bust another 6,000 jobs would have been lost, in suppliers and distribution.) </p>

And when the once mighty GM goes, bearing in mind its former components operations called Delphi has been in Chapter 11 for two years already, the value of new and second-hand GMs will plummet, and what price the assets then in GMAC? Or of houses in Detroit?

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They are already cheaper than a GM pick-up, that’s the big ones in good areas, so another 22% reduction will be a few thousand computer dollars only, which will make everything look just plain dandy to the raging bulls of Wall Street.

And while Tim was dreaming up the daft assumptions behind this exercise in the ridiculous, I wonder if he thought of factoring in the following imponderables: what if China stops buying T-Bills, which is probable? What if world trade continues its decline, as confirmed by the shipping indices? What if aerospace follows automotive as airplane orders stall, as they are? What if the bulls stumble and stock markets crash, and insurance companies become the new financial crisis, which is certainly possible? What price your stress tests then? I could go on, but you get the point.

And as for struggling banks here, just look at yesterday’s, May 7’s, appalling announcements from Lloyds, Société Générale, UBS, Commerzbank, Hypo Bank and UniCredit: they are all essentially bust, kept alive only by more put options on taxpayers. It’s enough to stress you out.

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