Friday, April 24, 2009

Rosner, Davis, Investors Comment on Fed Model for Stress Tests

Posted on Bloomberg by Michael J. Moore:

Eight analysts and investors commented on the Federal Reserve’s description of stress tests that have been conducted on 19 large U.S. banks.

The central bank released a so-called white paper today describing methods used by examiners from the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to calculate the capital buffer the banks will require through 2011 under two economic scenarios.

“The anticipation over the white paper appears to be much ado about nothing,” said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York. “The most significant numbers provided by the Fed in the paper appear to be the page numbers.”

The report was “completely worthless,” said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia. “We were looking for the translation of the economic forecasts to loan losses and we didn’t get that.” He said he was also disappointed there was no disclosure on how regulators will measure “adequate capital.”

“My problem with this is sort of like Garrison Keillor and Lake Woebegon, where all children are above average,” said Nancy Bush, an independent bank analyst at NAB Research LLC., referring to the host of public radio’s “A Prairie Home Companion” weekly broadcast. “We need to have some children who get punished for what they have done.”

“If they start focusing on tangible common equity and it’s going to be a significant part of Tier 1, banks will have to raise more capital,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

“A lot of triple talk,” said Jim Glickenhaus, who helps manage more than $1 billion, including shares of Bank of America Corp., at Glickenhaus & Co. in New York. “I think they’re going to say while things are bad, the end is not at hand. Maybe.”

“The question I have, by using fourth-quarter numbers, is this skewed positively?” said Lawrence Kaplan, an attorney with Paul Hastings, who served as a senior attorney in the chief counsel’s office at the Office of Thrift Supervision. “Because January and February were pretty lousy, and as a result that’s when it hit the fan.”

“I didn’t walk away with anything new out of this,” said Frederic Dickson, who helps manage $20 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “We’re missing a big piece and the big piece of the puzzle is what does the government assess is the appropriate level of tangible equity relative to risk-based capital. That’s a wild card that’s going to be very significant.”

“The assumptions the regulators have used here seem to imply that they’re anticipating a bottoming out of the economic downturn,” said Jeff Davis, director of research at Howe Barnes Hoefer & Arnett in Chicago. “The momentum in the economy might potentially make the alternative more adverse scenario the baseline scenario.”

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