Banks Stress Tests not the Beginning of the End of the Financial Crisis

Mathew Richardson and Nouriel Roubini, both professors at New York University’s Stern School of Business, in a piece published today in The WSJ concerning the state of the banking system said the results of the government’s stress tests on banks “will not mark the beginning of the end of the financial crisis.”

From WSJ: If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.

This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak — $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators’ conclusions.

We fear that we are back to bailout purgatory, for lack of a better term.

emphasis added

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