Wall Street and Stress Tests

Warren Buffett said the other day what was pretty much an open secret among financial professionals.  Geithner's stress tests of banks' capital adequacy were irrelevant to intelligent investment decisions even though Buffett's comment was specifically related to Wells Fargo Bank, his second largest holding in Berkshire Hathaway.  Read Here.

Geithner's "stress tests" served Wall Street on these grounds: first, these tests were a delay tactic  signaling to the nervous market the government was to "uncover" the true financial conditions of the banks.  The subtext was until the truth was revealed there was not reason to panic.  Second, the tests had enough ambiguity due to a lack of transparency to allow the banks themselves not to panic for it appeared those tests were not the same as "mark to market" discipline a free market demands.  Lastly, during this holding pattern while the tests were being conducted, Geithner's PPIP program was put in place to boost the value of toxic assets to further help the banks to pass those stress tests -- whatever they were. 

We still do not know how those tests were carried out, what assets did they apply do and indeed we read there is much internal government squabble as to when or how much the results should be released to the public.

A royal mess.