All plain sailing from here onwards?

Not according to some..

The bank stress test a sham? That’s exactly what an ex regulator claims. And while Wall Street is relieved that banks ‘only’ need another $75B in capital and unemployment ‘only’ increased by 500K+, we would say that the economy is far from being out of the woods yet.

This could all be just an inventory correction, as it’s quite difficult to see where the new demand is coming from.

Results of the stress test brought a collective sigh of relief from Washington D.C. to Wall Street Friday, and stocks were rallying again on a growing sense the financial crisis has past.Don’t you believe it, says William Black, an Associate Professor of Economics and Law at the University of Missouri – Kansas City.

“It’s in the interest of the financial community to send this propaganda out,” Black says. “It’s remarkable not that they do it but that it still works.”

In other words, this isn’t the first time we’ve been told “the crisis is over” and that “banks are well capitalized” – and probably won’t be the last.

The professor and former financial regulator foresees another wave of foreclosures and future bank losses of more than $2.5 trillion vs. the government’s $599 billion estimate.

Simply put, the stress tests weren’t strong enough to be considered “wimpy,” Black says. Furthermore, Fannie Mae, Freddie Mac, AIG and IndyMac were deemed to have “passed” much more stringent government stress tests before their respective failures, he notes, recalling the grim history:

  • Fannie and Freddie: In July 2008, Treasury Secretary Paulson testified that Fannie and Freddie were “adequately capitalized” under the test. In August 2008: “even in [Freddie’s] most severe stress tests, [show] losses … less than $5 billion.” Actual losses: 20 to 40 times greater.
  • AIG: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those [CDS] transactions.” AIG claimed in 2008 “Using a severe stress test … losses could go as high as $900 million.”
 Actual losses: 200 times greater.
  • IndyMac: Sold over $200 billion of “liar’s loans.” Actual losses: 160 times greater than its tests.
  • Rating Agencies: Their stress tests gave AAA ratings to toxic waste.  Actual losses: more than an order of magnitude greater.

“The examinations and stress tests are shams — always precise, always farblondget,” Black claims.

So while others are celebrating the end of the crisis, ask yourself this: If the government sees up to $599 billion in additional bank losses, why are they requiring banks “only” raise $75 billion? That suggests the government thinks the banking sector is overcapitalized by $525 billion.

“Once people learn they’re being lied to, they react very badly,” Black says. “And of course this is not the first lie.”

Maybe you really can fool some of the people all of the time.