The Residential Real Estate Crash Index Message Board

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Strategies & Market Trends : The Residential Real Estate Crash Index

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From: NOW	5/7/2009 8:35:45 PM
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"The fact that the stress tests took place at all was an admission of regulatory failure. Financial firms are subject to oversight, most important, of safety and soundness, on an ongoing basis. The notion that a one-shot effort is a substitute for insufficient supervision is spurious. Given that the minders were badly behind the curve thanks to years of believing that the industry could manage itself prudently, a crash effort to catch up was not a bad idea. But this should have taken place a year ago, when Bear Stearns exposed that no one really knew what was up at these firms. The fact that a bailout package was crafted based on a cursory emergency weekend review of complex trading exposures clearly demonstrated the dangers of ignorance. These stress tests fell far short of the needed level of review. But the stress tests fell far short of the needed level of review. First, they were administered by the industry based on scenarios provided by the industry. Most observers found the “adverse” case to be too optimistic. Even worse, banks got to use their own risk models, the same ones that got them into trouble. And there was no independent verification of the quality of the accounting. The number of examiners per bank was well short of what you’d need to probe a single business, much less an entire firm. Second, the industry got to negotiate the results. This is simply unheard of. That suggests both a lack of confidence in the process and a lack of belief on the part of the key actors (Treasury Secretary Timothy Geithner, in particular) that the government needs to set the parameters and demand compliance." Yves Smith has written the blog Naked Capitalism since 2006. She has spent more than 25 years in the financial services industry and currently head of Aurora Advisors, a management consulting firm.

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