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'Stress tests' for banks the latest sign of US crony capitalism
By Sin-ming Shaw |
May 19, 2009, Tuesday
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FOR 20 years, Americans have denounced the "crony capitalism" of Third World countries, especially in Asia.
But, just as those regions have been improving their public and corporate governance, crony capitalism is alive and well in the United States, a country that the world long considered the gold standard of a level playing field in business.
The recently completed "stress tests" of US banks are but the latest indication that crony capitalists have now captured Washington, DC.
It is no surprise that stock markets liked the results of the stress tests that US Treasury Secretary Timothy Geithner administered to America's big banks, for the outcome had been leaked weeks before.
Indeed, most professional investors trashed the tests as dishonest even as their holdings benefited from a rising market. Even The Wall Street Journal, usually financial markets' loudest cheerleader, disparaged the tests' integrity.
The government had allowed bankers to "negotiate" the results, like a student taking a final examination and then negotiating the grade.
The tests were supposed to reveal the true conditions of banks saddled with unaudited toxic assets in housing loans and financial derivatives. The reasoning behind the tests seemed unimpeachable.
Housekeeping
But was it?
As any seasoned banker knows, a well-managed bank should undertake internal "stress tests" regularly as a matter of good housekeeping.
The financial crisis should have mandated a running stress test to keep senior management up to date daily. Why, then, did the US need the government to conduct a financial exercise that bankers themselves should have done far better and faster?
The truth is that the tests were not designed to find answers. If the true conditions at many big banks were publicly revealed, many would have been immediately declared bankrupt, necessitating government receivership to stop a tsunami of bank runs.
Wall Street's titans, however, had convinced US President Barack Obama and his team that their continued stewardship was essential to getting the world out of its crisis. They successfully portrayed themselves as victims of a firestorm, rather than as accessories to arson.
The stress tests were meant to signal to the public that there was no immediate threat of bank failures. This message would stabilize the market so that prices for "toxic" assets could rise to a level at which bankers might feel comfortable selling them.
After all, senior bankers had been claiming that these assets were "mispriced," and that pricing them at market levels would penalize the banks unnecessarily.
So far, Geithner seems to have succeeded in his "tests," as the stock market has indeed more than stabilized, with prices of bank shares such as Citigroup and Bank of America quadrupling from their lows. The feared implosion of Wall Street seems to have been avoided.
A real picture
But no one ever seriously thought that the US would allow Citigroup and Bank of America, to name just two, to fail. In fact, the stock market bottomed out last winter. Markets had factored into share prices the belief that the US government would not allow any more banks to collapse.
What the world wanted was an accurate picture of what the banks were worth and "mark-to-market" valuations to guide investors as to how much new capital they needed.
The world also wanted to see the US retaking the high road in reinforcing business ethics and integrity - so lacking under the last administration.
As taxpayers had already put huge sums into rescuing failing banks, with the prospect of more to come, a transparent process to reveal how the money was being used was imperative.
But now negotiated stress test results have been released to "prove" that the banks are a lot healthier. Calling this a Ponzi scheme might be too harsh. But few financial professionals have been fooled.
(The author, a former founding chairman of a hedge fund and a private equity fund in Asia, has been a visiting scholar at Columbia, Harvard, Princeton, and Oxford. He blogs at sinmingshaw.blogspot.com. Shanghai Daily condensed his article. The views are his own. Copyright: Project Syndicate, 2009. )
But, just as those regions have been improving their public and corporate governance, crony capitalism is alive and well in the United States, a country that the world long considered the gold standard of a level playing field in business.
The recently completed "stress tests" of US banks are but the latest indication that crony capitalists have now captured Washington, DC.
It is no surprise that stock markets liked the results of the stress tests that US Treasury Secretary Timothy Geithner administered to America's big banks, for the outcome had been leaked weeks before.
Indeed, most professional investors trashed the tests as dishonest even as their holdings benefited from a rising market. Even The Wall Street Journal, usually financial markets' loudest cheerleader, disparaged the tests' integrity.
The government had allowed bankers to "negotiate" the results, like a student taking a final examination and then negotiating the grade.
The tests were supposed to reveal the true conditions of banks saddled with unaudited toxic assets in housing loans and financial derivatives. The reasoning behind the tests seemed unimpeachable.
Housekeeping
But was it?
As any seasoned banker knows, a well-managed bank should undertake internal "stress tests" regularly as a matter of good housekeeping.
The financial crisis should have mandated a running stress test to keep senior management up to date daily. Why, then, did the US need the government to conduct a financial exercise that bankers themselves should have done far better and faster?
The truth is that the tests were not designed to find answers. If the true conditions at many big banks were publicly revealed, many would have been immediately declared bankrupt, necessitating government receivership to stop a tsunami of bank runs.
Wall Street's titans, however, had convinced US President Barack Obama and his team that their continued stewardship was essential to getting the world out of its crisis. They successfully portrayed themselves as victims of a firestorm, rather than as accessories to arson.
The stress tests were meant to signal to the public that there was no immediate threat of bank failures. This message would stabilize the market so that prices for "toxic" assets could rise to a level at which bankers might feel comfortable selling them.
After all, senior bankers had been claiming that these assets were "mispriced," and that pricing them at market levels would penalize the banks unnecessarily.
So far, Geithner seems to have succeeded in his "tests," as the stock market has indeed more than stabilized, with prices of bank shares such as Citigroup and Bank of America quadrupling from their lows. The feared implosion of Wall Street seems to have been avoided.
A real picture
But no one ever seriously thought that the US would allow Citigroup and Bank of America, to name just two, to fail. In fact, the stock market bottomed out last winter. Markets had factored into share prices the belief that the US government would not allow any more banks to collapse.
What the world wanted was an accurate picture of what the banks were worth and "mark-to-market" valuations to guide investors as to how much new capital they needed.
The world also wanted to see the US retaking the high road in reinforcing business ethics and integrity - so lacking under the last administration.
As taxpayers had already put huge sums into rescuing failing banks, with the prospect of more to come, a transparent process to reveal how the money was being used was imperative.
But now negotiated stress test results have been released to "prove" that the banks are a lot healthier. Calling this a Ponzi scheme might be too harsh. But few financial professionals have been fooled.
(The author, a former founding chairman of a hedge fund and a private equity fund in Asia, has been a visiting scholar at Columbia, Harvard, Princeton, and Oxford. He blogs at sinmingshaw.blogspot.com. Shanghai Daily condensed his article. The views are his own. Copyright: Project Syndicate, 2009. )
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