Legal Commentary

"Nobody Makes It"

By Ethan Brown

Fascinating piece from Bloomberg on the little-understood "stress tests." According to Bloomberg:

"Regulators are using two economic scenarios for the tests. The first is a 'baseline' forecast of 8.4 percent unemployment and 2 percent economic contraction in 2009, followed by 2.1 percent economic growth and an 8.8 percent jobless rate in 2010. The other is a 'more adverse' scenario, with 8.9 percent unemployment and 3.3 percent contraction in 2009, followed by a 10.3 percent jobless rate and 0.5 percent growth in 2010."

[More...]

Trouble is, the unemployment rate is already exceeding the "more adverse" scenario. Indeed, according to Calculated Risk "the baseline case is no longer useful...the more adverse case is the new baseline."

So if the "more adverse scenario" plays out again--and that's certainly a possibility--the banks are going to be in deep, deep trouble.

How bad is it going to be? Here's Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia:

“The bottom line is if the unemployment rate peaks at 10 percent these banks can make it through. But if it peaks closer to 12 percent, nobody makes it. Or very few people make it.”

Full post as published by TalkLeft on April 13, 2009 (boomark / email).