Smell the B.S. – Fed Wants to Change Stress Test Again?

Welcome to the launch of my new posting category under Jim’s Notes… “Smell the B.S.” Sometimes when I am scanning analyst notes or headlines of the financial media I just want to scream and call bull#$*&! For more than 30 years it has been a goal to write a column on this, and I finally decided why not, this is my website and I can call it crap or S%#$ if I want to. My goal is to question what is being said versus just letting it go without being challenged in some way. The ultimate goal is to use this format to find investments in the manure. So, with that in mind let’s get started.

The most recent issue that I find of interest is the bank stress test BS that the Fed is pedaling. The New York Times released an article on Tuesday that outlined some of the Fed’s concerns relative to how the tests are being conducted as well as the way questions are being answered, and assumptions made. I think it is good if the Fed is actually doing this in an earnest attempt to make banks better and to keep the depositors safe. However, I find it interesting that this information from the Federal Reserve was released in conjunction with the White House wanting to finish the work on the Dodd/Frank Financial Oversight Bill. In fact there are meeting scheduled with the President this week.

That aside, the release by the Federal Reserve on Monday sent the bank index down more than 1% and some banks fell as much as 3% on the day. That was short lived as the they rallied back with the broad markets on Tuesday. The challenge with the stress test is it will not adequately prepare the banks for the next crisis, because no one knows what form the next event will take. There are some who believe the next crisis will be a result of the US debt being downgraded and creating a shift in how banks reserve assets, not to mention the size of US debt that is now positioned on the Federal Reserves balance sheet. They have been purchasing $85 billion per month on top of the previous $3 trillion already on the books. The challenge for banks may come from the very source that is attempting to regulate the banks balance sheets. Definitely food for thought!

All of this chatter and regulation talk is just that, talk. The short term nervousness it creates was seen on Monday, sell first and ask questions later. The details of this will continue to be forthcoming and how it impacts the banks to comply will be seen as all the facts are revealed. From my view, it is this type of rhetoric that keeps the banks undervalued fundamentally. I have discussed how the sector remains one to watch going forward, and for those with a longer term view, an opportunity.

My question for the Federal Reserve is simple, if you had enforced the rules and regulations that were on the books prior to the financial crisis in 2007-08, would we have seen as severe of a crisis as we experienced? In addition, by forcing (requesting) Bank of America, Wells Fargo, Goldman Sachs and others to take on the burden of the ‘troubled assets’ created by the companies that went out of business, was it just to have someone to sue later who was still in business, and blame them for the problems created by others? You can review those lawsuit filings by putting “U.S. sues banks” in Google search. It is all a vicious game of power and the loser is the consumer not the banks or the Federal Reserve. Look at the current cost of acquiring a home loan now versus 2007. All those fines, fees and costs to comply have been passed on the consumer once again. The real question is are we better off with the current regulations than we were with the old ones, if no one actually enforces them?

Despite all the challenges facing the banking sector it remains one of my top picks going forward with a long term perspective. KBE and KRE both remain on my watch list of sectors to own from the long term outlook. As for the Federal Reserve and the next generation of stress-tests on banks, we have to believe it is all for the protection of you and I going forward, right?