The Stress Test Fiasco

Many investors are awaiting the results of the stress tests that US banks have had to undergo as part of an effort to figure out the solvency and transparency of the institutions that accepted TARP money last year. However, the parameters and details of the test have many people worried. Without a real, independent stress test, US consumers and investors will have no real idea of the true solvency of the financial institutions that have accepted billions in federal help.

There is some question as to whether or not it is even possible for banks to fail this most recent stress test. Was this test designed to show that all banks would pass with flying colors and therefore hope to reestablish faith in the financial sector? Analysts speculate that this may be the case, with the test designed so that no bank could possibly fail. It’s a very hard sell to investors, who have been waiting for the banks and the Fed to come up with a system of judgment.

The likely scenario will leave many banks in the dust. Banks that are shown through this “test” to be slightly less solvent, and therefore needing more TARP funding, will be on the second tier in relation to other banks that will be shown to require no more TARP funds. So banks like Goldman Sachs and Wells Fargo will do excellent, and their stock will rise, while other smaller, less conservative but relatively equally as solvent banks will get clobbered and their share prices will reflect that. I don’t believe it’s fair to come out with the results of a less than fair, less than honest stress test. The test results will likely push the markets upward as the bull continues to gain steam, only to push the markets back in the negative as more realistic sentiments set in that the recession is still getting worse and it’ll be years before any real recovery will happen, especially in the US.

The rollercoaster ride of a bull market that has been in existence for a little over a month now will likely continue until the US government or the US public begin to demand real stress tests for the bank. We have already surpassed the worst-case scenario described in the current stress test regarding unemployment. The test assumed less than 9% unemployment, and as a nation we are already sitting at almost 10.3%.

The big picture for investors looks very bullish in the short term, but it’s questionable in the mid to long term. Investors really need to be weary in the coming months and read between the lines when it comes to government action in the financial sector. The true stress test will be whether or not the recent bull market can survive long term, through the summer and fall. If the recovery is to have any teeth whatsoever, the market needs to prove to investors that it is ready to begin rebuilding in earnest, and the short seller need to come out of the woodwork so to speak as investors begin to rebuild confidence as well