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Video: Martin Weiss Blasts Stress Tests

By Dan Weil   |   Monday, 04 May 2009 05:21 PM

Martin Weiss, author of "The Ultimate Depression Survival Guide," says the bank stress tests being released by Treasury are graded on a curve at best. And he thinks several big banks could fail just the same.

Weiss, president of Weiss Research, says the tests are simply a sham.

He sees two problems with them. “First, they’re grossly underestimating the risks that banks are facing over the next months,” Weiss tells Moneynews.com.

“When you set a test, you can either make it an easy test or a tough test. For a stress test, traditionally regulators have been very, very tough.”

They ask the key question, he says: “Do you have enough capital to withstand a depression?”

The problem now: “They’re not asking that question. They’re afraid of the answers.”

What regulators are doing, Weiss says, is “they’re asking the question: If we have somewhat of a worsening in the economy based on what the consensus economists are expecting, then how would you survive that situation?”

The flaw there: “As you know, the consensus economists have always underestimated the severity of this crisis,” he says.

“Second, despite the fact that it’s an easy test, we still have at least six or seven major banks in this country that are failing the easier test.”

These banks, Weiss says, “still don’t have enough capital to withstand the risks and losses that would naturally accrue from that not so bad scenario.”

That’s not it, he says. “The federal regulators are in effect passing out cheat sheets, making it easier for the banks to qualify various kinds of capital,” Weiss points out.

“For example, the capital includes all kinds of intangible assets that may bloat the apparent capital,” he says.

“Finally, after being given the results of the test privately, all of these banks that failed have been given the opportunity over the last week or two to protest.”

If banks are in danger of failing as institutions, bank regulators’ doctrine has been “we’re not going to let it happen,” Weiss says. “We’ll do whatever it takes to prevent them from failing, because too big to fail is…our promise,” he says.

Weiss points out that the too big to fail doctrine is itself failing in two ways.

“First, it’s not resolving the crisis, it’s only perpetuating the agony,” he says.

“More importantly, there are now voices…that are rebelling against the too big to fail argument,” Weiss explains.

“You have a taxpayer revolt. The public is becoming more and more skeptical of their tax dollars being thrown down the drain.”

High-level government officials have spoken out against the doctrine as well, Weiss notes.

Separately, he says government policy has raised the threat of inflation and debasement of the currency.

“We will see episodes of that,” Weiss predicts.

“The bottom line is there’s no free lunch, whether they raise taxes or they borrow or they print. None of those comes without very, very severe consequences.”

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Martin Weiss, author of "The Ultimate Depression Survival Guide," says the bank stress tests being released by Treasury are graded on a curve at best. And he thinks several big banks could fail just the same.Weiss, president of Weiss Research, says the tests are simply a...
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2009-21-04
 

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