The government’s stress tests for banks, while aimed at shoring up public confidence, have turned into what some investors are calling an exercise in smoke and mirrors.
The tests are not stressful enough, these investors say. The 19 large banks targeted by Treasury were subjected to worst-case scenarios in which unemployment rises to a 9 percent rate this year from 8.5 percent today – but many economists say 10 percent or higher is a more realistic scenario.
“The federal bank stress tests are inadequate and misleading,” said Martin D. Weiss, founder of Weiss Research, an investment research group. “The overwhelming majority of the 19 banking institutions are at risk of failure or borderline, and very few are currently strong enough to weather a worst-case scenario” envisioned by investors outside of Washington, who think the unemployment rate could go as high as 12 percent.
Wall Street titan Morgan Stanley and CreditSights, an investor research firm that has conducted its own stress tests on banks, also say the government is assuming a milder economic downturn than is likely to occur.
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