Fed Stress Test a Farce

Last Friday, the Federal Reserve announced it completed its so-called Fed stress test on 19 of the country’s largest banks. Improved financial health allows some banks to “increase or restart dividend payments, buy back shares, or repay government capital.” The news was met by some mainstream media outlets with jubilation, even though the Fed did not disclose which banks did well and which banks did not. However, Wells Fargo, J.P. Morgan, U.S. Bancorp and BB&T were some of the banks that almost immediately announced dividend increases. The Fed said, “The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks’ long-term access to capital. Such access will support lending to consumers and businesses.” (Click here to read the complete Federal Reserve press release and report.)

Funny, I thought the bank bailout was supposed to encourage more lending. The dividend increases will fatten the paychecks of bank executives, but I don’t see lending taking off anytime soon. There was plenty of information about what went into the Fed assessment of the financial health of the banks, but “mark to market accounting” was not mentioned one single time in any release or report I read from the Fed. “Mark to market accounting” is simply valuing an asset for what you can get for it today. It has been a standard method of accounting much of the 20th century, and it is how the IRS values assets.

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