Banks Push Back

Geithner was to release the results of the stress test Monday, but Geithner pushed it back to Thursday. The WSJ notes there are objections from some banks:

The results were pushed back several days as federal regulators and the banks have continued to debate the results. Several banks, including Bank of America Corp. and Citigroup Inc., have challenged the government's findings.

The results are expected to show that several banks may need more capital, or a higher quality of capital, in order to continue lending if the economy worsens through 2010.

You see, if the Government says that the sensitivity of mortgage portfolio to a 13% unemployment rate and 20% house price fall is to lose 30% of its value, the banks say 10%, the data will be inconclusive. The standard errors to this hypothetical are too large. Lots of details matter: loan-to-value, fico scores, loan vintage--and these interact in various ways, and as home prices have not fallen a lot historically, you have very few observations to generate an empirical estimate of a multivariate relationship. Thus, if the Treasury does force their stress tests through, and equity investors lose 50% of their value, I smell lawsuit. Remember that in the S&L crisis, many bank recovered billions as courts found the government's redefinition as to what counts as capital, sufficient for a bank to be a going concern, was not justified.

Currently, release is expected Thursday afternoon (May 7).