Fed Assured Banks They Don’t Have To Raise Amount Mandated By Stress Tests

Over at ThinkProgress, Faiz Shakir highlights a report showing that the nation’s 19 largest banks successfully lobbied to make their stress tests less stressful. For instance, the test results — which were released on Thursday — showed that Bank of America needs to raise about $34 billion in capital. But the original test, before the bank’s lobbying, found that BofA was $50 billion in the hole.

And that’s not all. According to a report in the Financial Times, the banks have been assured by the Federal Reserve that they don’t actually have the raise even the amount mandated by the less-stressful tests:

US banks have been given government assurances they will be allowed to raise less than the $74.6bn in equity mandated by stress tests if earnings over the next six months outstrip regulators’ forecasts, bankers said. The agreement, which was not mentioned when the government revealed the results on Thursday, means some banks may not have to raise as much equity through share issues and asset sales as the market is expecting. It could also increase the incentive for banks to book profits in the next two quarters.

This is a troubling development, considering that the banks used all sorts of accounting gimmicks — including making entire months disappear from their books — to record “profits” in the first quarter of this year. This assurance from the Fed gives them every reason to pull similar tricks again. And thanks to a new financial instrument derived by Treasury as part of the tests, the banks can go out and raise funds from private investors while counting on a government guarantee.

Two banks — Wells Fargo and Morgan Stanley — have reportedly been quite successful at raising capital from the private sector in the days since the stress tests results were released. But it’s looking more and more like the goal of the tests was to boost confidence in the banks by papering over their problems and assuring them that all possible steps to make them appear healthy would be taken.

Update:

Henry Blodget at Clusterstock: “Thank goodness we did away with mark-to-market accounting. Now the banks can just ‘earn’ all the money they’re supposed to raise!”