"The latest leak, arriving curiously after the markets closed, is that the Treasury wants Citigroup to raise $10 billion as a result of the famed stress tests, which the bank is fighting tooth and nail. ... On the one hand, the stress tests aren't turning out to be the complete farce that I had thought they might be (my benchmark was whether Citi got off clean while some regional banks, such as Fifth Third, were dinged to validate the process. ... Consider: ... There was no verification of underlying accounting and loan books, not even a teeny bit of sampling. ... I suspect the hope was that Treasury would draw the line is at a place that the banks would look more or less OK, with only minor remedial action required. ... A regulator with any guts would not take backchat from its charges on a determination of safety and soundness. ... So bizarrely, Citi holds a sword of Damocles over the Treasury, as much as AIG does. ... [YS here inserts the confidence 'money quote']. While this may be shorthand, it reveals a preference for optics over substance. The priority should be to assure depositors and investors that banks are sound, not to 'restore confidence', a more nebulous and subjective standard", my emphasis, Yves Smith (YS) at Naked Capitalism, 2 May 2009, link: http://www.nakedcapitalism.com/2009/05/bank-stress-test-dance-of-seven-veils.html.
I had not planned on posting on the "so-called stress tests", calling them a "Kabuki dance" from the outset, disagreeing with YS who called them the "Dance of the Seven Veils". I agree YS, these tests were "choreographed". Did Zimbabwe Ben channel George Balanchine for instructions? Their purpose was not "to assess the health of the country's 19 largest banks", but "to restore confidence in the US banking system". E&P, get on the stick. More skepticism, please. Paraphrasing Mark Antony in Julius Caesar, 3:2:81, "The Fed came to praise the TBTF banks, not to bury them". These tests remind me of Tom Sawyer whitewashing the fence. Or Brer Fox throwing Brer Rabbit into the briar patch found in Uncle Rhemus Tales. "Oh please, anything but subjecting a bank to the stress test", these tests are as threatening as Monty Python's "comfy chair" used by the "Spanish Inquisition" as a torture device.