Second, in just the past six months, the IMF has doubled its estimates of aggregate losses for loans and corresponding securities to $2.7 trillion, resembling our estimates at RGE Monitor of $3.6 trillion. If true, these estimates put the financial system on the brink because the financial sector holds half of the losses. Since the nineteen largest banks own the vast majority of assets, it therefore follows that they must also be holding the losses.
Third, each bank clearly had the incentive to sugarcoat their expected losses to regulators. Nothing good could come from aggressively marking down their books. So while the losses are calibrated to be consistent across all nineteen banks, the overall level of the losses will be downward biased. This explains why the stress tests don’t completely jive with either the above market estimates or the stock market drops.
As you can imagine the Fast Money traders have a thing or two to say on the stress tests. Curious? Watch the video above!
> Click here to read Roubini’s entire guest blog post for CNBC
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Trader disclosure: On May 11th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Macke Owns (GE), (AGU), (AMZN), (APPL), (SDS), (IMAX), (WFC), (TGT); Seymour Owns (AAPL), (BAC), (C), (DRYJ), (EEM), (FCX), (PBR), (TSL); Seymour's Firm Owns (RIG); Najarian Owns (AMD) Call Spread; Najarian Owns (BX) Call Spread; Najarian Owns (CROX) Calls; Najarian Owns (FIG); Najarian Owns (INTC) Call Spread; Najarian Owns (MS) & (MS) Calls; Najarian Owns (PALM) & (PALM) Calls; Najarian OWns (XHB) Call Spread; Najarian Owns (XLB) Call Spread; Najarian Owns (XLU) Calls
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