Sunday, May 10, 2009

The Biggest Stress Test Lie

In past posts, I have written about the bogus Stress Test economic assumptions (4/24/09) and the chosen benchmark capital ratio (5/9/09). Today, I would like to highlight the biggest fraud of the report: expected net income.

The report states that over 2009 & 2010, the Fed expects the 19 banks to generate adjusted net income of $362.9 billion. This would enable the institutions to survive on the meager capital additions that the report demanded. This amount is utterly unreasonable. Of that $362.9 billion, I will allocate $145.16 billion to 2009 and $217.74 billion to 2010.

The ENTIRE Banking Industry:

Total Assets on 12/31/2008: $13.898 trillion

Based on the above graph, I will be generous and forecast a 2% growth rate for 2009 and a 5% growth rate for 2010. That would bring average 2009 total assets to $14.176 trillion.

Using data for the last 10 years, I created the following scenarios. Click on graphs to review recent return on asset data:

ROA Net Income
Duplicating Best Year $ 195,630,429,780
Dream World $ 226,817,889,600
Average $ 156,066,172,901
Average, Excluding 2008 $ 170,538,700,743
Trend $ 102,540,587,590

So, based on historic trends, the Fed is forecasting that those 19 banks will make as much as one would expect the entire industry to make.

In fact, even adjusting the record 2006 numbers for inflation, the best year for banking was worth $154.7 billion.

Caveat emptor.

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