Grading on a Curve

The Obama Administration has reversed its approach from earlier this week and last, and decided it will reveal the results of stress tests. But it warns that it will be grading on a curve to make sure all the zombie banks can pass into the next grade and eventually graduate (rumor has it that JP Morgan Chase also wants to be cleared to play football).

The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest.

While all of the banks are expected to pass the tests, some are expected to be graded more highly than others.

Understand, though, at least as David Sanger tells it, the Adminstration is not revealing the results of the stress test because it decided transparency is good. Rather, it is doing so because Goldman Sachs and Wells Fargo forced its hand.

The administration’s hand may have been forced in part by the investment firm Goldman Sachs, which successfully sold $5 billion in new stock on Tuesday and declared that it would use the proceeds and other private capital to repay the $10 billion it accepted from the government in October.

That money came from the Troubled Asset Relief Program, or TARP, and Goldman’s action was seen as a way of predisclosing to the markets the company’s confidence that it would pass its stress test with flying colors.


Citigroup and Bank of America made positive statements about the current quarter weeks ago, and last week, John Stumpf, the chief executive of Wells Fargo, said the bank was in good shape and expected a $3 billion profit this quarter. The Wells Fargo statement appeared to frustrate some Treasury officials, and regulators clearly fear it will be more difficult for them to issue negative assessments of banks that have already proclaimed that they are in good shape.

A Wells Fargo spokeswoman, Janis Smith, said the company would not comment on interactions with its regulator.

At this point, the Obama Administration needs to realize something else about their plans to bring back the banking industry. These banksters believe they will be and can be immune from regulation. They are treating their gravy train and regulator like a doormat. 

So it’s probably a good idea to impose the new regulations now, before doling out more money in PPIP. Because until that happens, these banks will be doing nothing but gaming the system. 

Update: See Yves at Naked Capitalism on this.  She’s particularly impressed that the Administration planted a story to blame this all on Goldman Sachs. 

27 replies
  1. TomWells says:

    Unless we break the power of the banksters and the gov’t collaborators (Summers/Geithner), none of Obama’s progressive transformation of the economy will happen.

    • Leen says:

      Noam was visiting with Amy Goodman the other day. he had lots to say about the banks and Obama. Had no idea Chomsky is 80..what brain power. Glad he is on our side
      Noam Chomsky on the Global Economic Crisis, Healthcare, US Foreign Policy and Resistance to American Empire…..l_economic

    • tehcatlady says:

      Isn’t it obvious by now? Saving Wall Street’s @ss IS Obama’s ‘progressive transformation of the economy.’

  2. JimWhite says:

    While all of the banks are expected to pass the tests, some are expected to be graded more highly than others.

    A bank that accumulates three gold stars will be allowed to be the line leader at the end of recess.

      • Synoia says:

        The descision not to reveal the test results speaks for itself.

        If the results were good, they’d be on front pages, and front & center in the quarterly reports.

        The test results had to be reworked. When we get the results they will need close insprection to determine how they lie.

  3. phred says:

    The more we hear about these “stress tests” the more of a sham they are revealed to be. Will Treasury finally give Warren’s committee the details on the tests they have asked for? Will there be a real review of the process given to the public? Nope. This is infuriating. Geithner/Summers believe themselves to be untouchable, so they can do whatever they want. They are free to loot the treasury at will to keep their buddies in Rolexes and diamonds, because there is no one to stop them. And as long as the campaign coffers remain full, Congress will dutifully look the other way. The government isn’t even putting up a decent pretense any more. Disgusting.

  4. BoxTurtle says:

    So it’s probably a good idea to impose the new regulations now

    I agree. We need to understand how we got here and put regulations in place to make sure we never get here again. The banks will fight them tooth and nail (am I the only one impressed that they still have all this ready cash for lobbying?), but the environment now is toxic and it’s likely they couldn’t hide in the shadows.

    But I have real doubts about this stress test. The government is not telling ANY details about what’s involved and that’s a big red flag to someone like me. Never mind the banks grades, tell me how you are going to determine them. How much is is capitol on hand worth per dollar? How much does it hurt you if you’ve got too much in real estate? Or GM stock? Just telling us a grade would be worthless.

    Boxturtle (EW, you get an “A” but I’m not telling anybody what you did or didn’t do to earn it)

  5. Arbusto says:

    It’s April 15th, look on the bright side. Maybe Obama wants the new FDIC hires in place to seize the multiple banks that flunked, even on a skewed curve.

  6. zak822 says:

    The more we learn about the stress tests, the less they look like tests. Now we learn that no one will actually fail the tests. And they intended that the taxpayers wouldn’t get to know who did well and who did not, at least until very recently.

    I coulda used tests like these when I was in school.

    • BoxTurtle says:

      What likely happened is that initially the tests were good tests, and unfortunately either the failure rate was too high or specific institutions that couldn’t be allowed to fail did fail.

      So they hid those results and tried to come up with a test that looked realistic but that would improve either of the above. But they can’t publish that test, because it wouldn’t take long for EW to find the holes.

      Now they’re “grading on a curve”. Hrrumph.

      Boxturtle (And trying to convince people that All Is Well)

  7. fatster says:

    What are the chances they’ll publish the methodology used, type and amount of data collected, etc., for these “stress tests:? Yep.

  8. Peterr says:

    It’s not like the government has been hiding bank performance data. These particular stress test results may be hidden for the moment, but lots of other data is put out quarterly in the Uniform Bank Performance Report, available through the Federal Financial Institutions Examination Council. Per their website’s About Us page:

    The Council is a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) and to make recommendations to promote uniformity in the supervision of financial institutions.

    Now these reports are not the special “stress tests” designed to measure very particular things — but they do include precisely the kind of data that serious investors in the financial sector look at, as they try to determine which banks are worth investing in and which are not.

    Hiding data from the market is rarely a good idea. Indeed, if a private company tried to do that on its own, the SEC would be on them in a minute.

  9. bmaz says:

    “Some pigs are more equal than other pigs.”

    For some reason, can’t get that out of my head.

    Yes, those are the pigs that are too big to go to market fail.

  10. FrankProbst says:

    I really don’t understand all of this. If all of the banks are in such fantastic shape, why do they need taxpayer money?

  11. Minnesotachuck says:

    On the topic of banking, Wired has a scary piece up this morning about robbing banks in a new “old fashioned” way that doesn’t involve owning the bank: hackers have figured out ways of capturing PIN numbers off of the ATM infrastructure.

    Hackers have crossed into new frontiers by devising sophisticated ways to steal large amounts of personal identification numbers, or PINs, protecting credit and debit cards, says an investigator. The attacks involve both unencrypted PINs and encrypted PINs that attackers have found a way to crack, according to the investigator behind a new report looking at the data breaches.

    The attacks, says Bryan Sartin, director of investigative response for Verizon Business, are behind some of the millions of dollars in fraudulent ATM withdrawals that have occurred around the United States.

    “We’re seeing entirely new attacks that a year ago were thought to be only academically possible,” says Sartin. Verizon Business released a report Wednesday that examines trends in security breaches. “What we see now is people going right to the source … and stealing the encrypted PIN blocks and using complex ways to un-encrypt the PIN blocks.”

    The writer suggests that the only way to fully plug the vulnerability is to redesign the system from the ground up.

    • Synoia says:

      That does not make sense. PINs are not cached or calculated at ATMs, because that wil not work. The PINs are held back in the data centers, and encrypted in transit…

      Here’s the key “attacks that, with the help of an insider”.

      There is nothing a consumer can do to protect against an inside job. That’s like stealing money for the bank vault. It’s the banks problem.

      • Minnesotachuck says:

        The problem, however, is that a PIN must pass through multiple HSMs across multiple bank networks en route to the customer’s bank. These HSMs are configured and managed differently, some by contractors not directly related to the bank. At every switching point, the PIN must be decrypted, then re-encrypted with the proper key for the next leg in its journey, which is itself encrypted under a master key that is generally stored in the module or in the module’s application programming interface, or API.

        As I read it, the vulnerability appears to be the Hardware Security Modules (HSM) and the fact that PIN messages have to be decrypted and then re-encrypted at every HSM along the path. Which means there are plenty of opportunities for a corrupt insider to make mischief.

  12. abuelita says:

    In another part of the swamp, check “Bankers get a model rush”
    By Julian Delasantellis…..9Dj02.html

    The FASB has obligingly changed its accounting standard from mark to market to mark to model, meaning the banks can value their toxic assets at whatever model they choose–or dream up.

    Like I always say, if at first you don’t succeed, change the rules.

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