In recent weeks the stock market has rallied--it's up another fraction of a percent today--despite what would appear to be some sobering realities. Chrysler declared bankruptcy yesterday (President Obama says the multi-billion dollar company will go through this quickly; has he ever even read a bankruptcy filing? Even the puny little million-dollar cases I've reviewed take a couple years). Meanwhile, banks are bracing for (and apparently fighting) the results of a stress test the government has reportedly run.
I've not said anything about the stress tests, in part because I, like everyone else commenting about them, don't know what the tests actually are. The government says they're checking the 19 biggest banks to see if they're solvent and to make sure they raise more capital if they aren't. Commentary has ranged from "the fix is in" (read: that is, the government won't let anyone important like, say, CitiGroup, fail the test) to "the tests are killing the banks" (read: so the government has pushed back the public release of the results from April to May, and now from May 1 to next Thursday). No one who is paying attention thinks these stress tests will show citizens anything real.
The thing I keep coming back to with this issue is the apparent confusion--and I think that among the political bosses it's deliberate--between a liquidity problem and a solvency problem.
A "liquidity crisis" occurs when you get to the cash register after eating a nice meal out and notice, for the first time, the sign that says no credit cards accepted. If you've got only $22 in your wallet and your tab is $63.80, that's a liquidity crisis.
A solvency crisis is something else. If liquidity means you don't have $63.80 in your wallet, insolvency means your credit cards are already maxed out and you don't have $63.80 in the bank. Because "credit has dried up," the government has been claiming this financial crisis is a crisis of liquidity. The stress test is supposedly discovering whether our financial institutions have $63.80 in cash or real assets.
In many cases, it is far from certain that they do, and I've explained as best I can in broad strokes of why this is, from the trouble with "Level 3" assets, to the issues involving their disposal. But the details underlying bank regulation can be really complicated, and I'm no expert on any of it. So I'm left kind of speechless when I come across something such as this announcement regarding Changes to the Discount Window & Payment System Risk Collateral Margins Table.
This document has the look of a pretty big change. It appears to say that banks were told that, beginning April 27, the loan-to-value ratio on the assets they pledged as collateral to the federal government changed, and for the worse. Friday, one week ago, they could borrow from the fed 85 percent of the stated value of the home equity loans they had made. On Monday, 50 percent.
Stress test, anyone?
I don't understand enough bank regulator-speak to really know what this thing is saying. It just looks bad, and all the reporting I've come across on the banking crisis and the stress tests have failed to mention this one little data point. That might mean it's not important. It might mean that I'm ignorant and missed the big story. Or it might mean--and with the state of journalism these days, I have to think this possibility is real--that it actually is a big deal, but that the press missed it.
At times like this I miss the late Tanta--aka Doris Dungey--who used to post pointedly detailed and knowledgeable minutia about banking on the Calculated Risk blog. Tanta would explain what this stuff means.
Now, I'm not saying it would do any good. Looking back two years at a short Tanta post and some of the responses sums up what I think is a deeper problem ailing our nation's response to the financial crisis: