Financial Health Requires More Stress, Not Less


Most of us want to eliminate stress, but in order to restore financial health one widely followed expert says we need more – much more.

On CNBC Nouriel Roubini, aka "Dr Doom" said that the stress tests for 19 major banks were not "stressful enough."

Roubini charges the tests lack credibility and don't go far enough because the actual economic data are likely far worse than the worst case scenario of these tests.

In a guest blog Roubini outlines why he reamins bearish. We’ve re-published his remarks here.

From “Dr. Doom: How To Repair A Failed System

First, even with the recent economic news, the stress tests weren’t worst case scenarios; in fact, for some of the components, like unemployment, reality is actually already worse than the more adverse scenario. And at the rate at which job losses are taking place, the unemployment rate in the fall of this year may be already higher than the unemployment rate assumed in the more adverse scenarios of the stress tests for 2010.

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!

Read More:

> 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 with wires