The bank stress tests in the U.S. and Europe are total baloney. I’ve said it before and I’ll say it again for the benefit of whoever is stumbling upon my wisdom for the first time. Comparing the safety of Citigroup (C) and JPMorgan (JPM) is like comparing whether a ton of bricks or a ton of lead is more useful as a flotation device. Citigroup had multiple TARP bailouts and JPMorgan let the London Whale gamble with its entire capital cushion. The whole notion of safety means little to investors who are outside the small circle of politicians and industry insiders who have made provisions for the next round of bailouts.
The stress tests have to be frauds because the stealth bailouts they mask have been underway for some time. The Fed cannot tighten its loose monetary policy because SIFIs need the Fed’s purchases to take bad mortgage-backed securities off their balance sheets. I don’t bother reading news commentary about whether job growth is sufficient to meet the Fed’s criteria for ending QE. That is deliberate misdirection worthy of the most skilled illusionists in human history.
Real safety can be found in the balance sheets of financial institutions that never needed TARP money. That would include the large number of credit unions, discount brokerages, and smaller banks with very stringent home mortgage origination criteria. Let’s throw in any institution that has zero exposure to student loans (good luck finding one).
Full disclosure: No position in C or JPM.