Q: Are the annual stress tests good for bank stocks?Early in 2009, when the Federal Reserve Board began the annual exercise of “stress tests” for banks, confidence in the US financial institutions was nonexistent. The year before, Treasury Secretary Hank Paulson almost single handedly cratered the US economy by embracing the creation of a “Super SIV” to buy bad assets from the largest banks. Paulson’s ill-considered comment told investors that US banks like Citigroup (NYSE:C) were insolvent.
The IRA is writing today from Camp Kotok, which is held each year at Leen’s Lodge in Grand Lake Stream, Maine. We are in Washington County, which is on the border of New Brunswick, Canada, and about 200 miles north of Bangor up Rt 9. This is Down East Maine, the land of Thoreau with rolling hills and lots of beautiful rivers and lakes.The conversation this year is much the same as the narrative on Wall Street, focused on the new records for asset values and questions about what happens next
“Markets go up on an escalator, they come down on an elevator. This is the most hideously overvalued market in history.”David StockmanLast week’s action by the Fed was an effort to restore normalcy, but in the context of extraordinary action by the central bank. When you tell markets that the risk free rate is zero, it has profound implications for the cost of debt and equity, and resulting in different asset allocation decisions. Ending this regime also has profound implications for investors.
“Stock prices have reached what looks like a permanently high plateau.”Irving FisherOctober 1929This Thursday The IRA’s Christopher Whalen will be in Washington to participate in an event at Cato Institute, “Financial Crisis and Reform,” We’ll talk with Cato’s Ike Brannon about whether enough has been done to “fix” the problem, real or imagined, with Fannie Mae and Freddie Mac. The question posed by the title of the Cato Institute panel suggests that Washington has the slightest idea about the
“[F]rom early spring throughout 2009 and until mid-year 2010, the Fed engaged in the first major quantitative easing program of purchases of government agency debt and agency-guaranteed mortgage-backed securities.