The Bank 'Stress Tests' Were Neither Stressful Nor Tests

Posted by David Sirota, Open Left at 9:13 AM on May 12, 2009.

So, call me crazy, but I thought after the Enron and Arthur Andersen meltdowns, the government had gotten out of the business of bending over backwards to help companies cook their books. In fact, yes after reading this Politico piece by the generally solid Eamon Javers, it seems I am crazy.

The article goes over 5 different ways the Obama administration turned the much-vaunted "stress tests" into government seals-of-approval for all sorts of accounting shenanigans. Here's an example:

December was probably an awful month for Goldman Sachs. What to do? Make it go away. The investment house changed its fiscal calendar, so that the year ended in December, rather than in November in the past. That had the effect of eliminating December's results from public disclosures...

Firms took advantage of new accounting rules that can make the same business results look better on the bottom line - like the way Citigroup added an additional $2.7 billion on the bottom line simply by tweaking the math for the first quarter.

It worked. Traders started buying bank stocks again, and the White House didn't make a peep of complaint.

What's amazing is that the media and the administration even called these "stress tests" tests at all, considering "The government announced early on in the process that every single bank would "pass" the stress tests."

Additionally, Javers asserts that the White House actually deliberately relied on Wall Street's insider trading culture to leak the stress test results throughout the financial industry before it was released to the public. This is portrayed as a genius move by the White House because it lessened the potentially negative market impacts of the results. Of course, as the Center for American Progress notes, that kind of selective leaking - and the White House actually relying on that leaking - created a situation perfect for insider trading.

Put all this on top of the Wall Street Journal report about bank executives getting the Federal Reserve to water down its findings, and what we have here is something people are calling a "stress test" that nonetheless validated Enron-style accounting tricks; relied on - and didn't crack down on - insider leaks; and guaranteed passing grades, regardless of whether the institutions being graded are healthy.

And this, according to White House Budget Director Peter Orszag, is the definition of "having a good week."

David Sirota is a veteran political strategist and author of Hostile Takeover, a New York Times bestseller about the corruption of both political parties.