Bank Stress Tests: Is Everyone Confused Yet?
The public relations campaign packaging the bank stress tests is kicking into high gear and our professional information managers are really hitting their stride. They face, of course, a classic spin problem: You need to get the information out there, but you don't want to be too definitive on the first day or soon after. If you're easy on the banks, that looks bad; if you're tough on the banks, that might be dangerous.
The best way to handle this is by jamming your own signal, which they are starting to do in brilliant fashion. To the Wall Street Journal you leak that Bank of America needs to raise a great deal of capital ($35 billion); they run this story on the front page, next to a great frown on the face of Ken Lewis. But you tell the Financial Times that CitiBank will need "to raise less than $10 billion" (note that the online Financial Times version of this story, as of 8:30 am Eastern, seems to have been adjusted downward relative to the print edition that arrived at my house.) The New York Times yesterday sounded quite upbeat.
Of course, deliberately or inadvertently confusing people is made much easier by the fact that the experts are in sharp disagreement. Goldman's Jan Hatzius says that the worst is now behind us in terms of loss recognition, and preprovision earnings will be much higher in the United States than they were in Japan during the 1990s; here he and others are taking on the IMF's Global Financial Stability Report. And he has two good points in this regard:
"Although we agree that top-line revenue growth is likely to be relatively weak, this should be offset by cheap and largely government guaranteed funding, a steep yield curve, and ample spreads on bread-and-butter lending. We believe that these spreads will remain relatively wide even as risk appetite returns, because they partly reflect the lack of lending capacity following the demise of the shadow banking system and not just the cyclical increase in risk aversion."
In plainer economic terms: The big banks that survived have more market power and access to large government subsidies. Larry Summers is quite clear: "Supporting financial intermediation" is a "critical node" in the President's economic strategy.
Still, Dick Berner of Morgan Stanley pushes back, arguing that the cumulative losses will continue to increase, "Upward revisions to our loss estimates reflect higher loss severities, primarily in securities." And other well-informed parties continue to warn about forthcoming problems in commercial real estate, consumer balance sheets, and of course the European economy. I'll review the latest European developments in my Economix column tomorrow, but let me preview it this way: not good.
What will be the overall impact ofthe stress tests announcements on understanding our overall economic and financial situation? To paraphrase slightly Larry Summers' smiling response to a question (actually on the future of Fannie and Freddie) after his recent speech at the Inter-American Development Bank, "if you think that was a clear answer, you weren't paying close enough attention."
Also posted on Simon Johnson's blog, Baseline Scenario.