Farrell: Getting Stressed Over Europe's Stress Test

No way only 7 of 91 European banks could pass a real stress test. No way could only €3.5 billion in new capital be needed. When the US tested 19 banks a little while ago, 10 were found to be deficient, and $75 billion in new capital had to be raised. It's ok if everyone at MIT passes every test.

How could an MIT student not pass a test? At least and still stay a student at MIT for a cool gazillion dollars a year in tuition. Or at a lot of other places, I know, I know. Probably your school as well. But I don't think I know anyone who went to MIT, so I use it as the example. I personally found lots of tests to not pass. But then I survived and maybe the European banks will as well, but the announcement of the tests resultscaused the market to rally last Friday and that makes no sense to me.

The criteria to pass was that your Tier One capital would stay at 6% or better even under what the test called the most "adverse circumstance."

AP

Euro bills and coins in cash register tray

Forget the details but the most adverse circumstance would be a mild recession.

The whole point of the test was to see if the bank(s) could survive a sovereign default.

That never came up.

What was (inadequately) measured was the haircut sovereign bonds would take if times turned bad. German banks didn't reveal their holdings and the other banks only said what the size of the haircut would be for bonds held in "trading" accounts and not in "held to maturity" accounts. We don't know what is where or how much. Portuguese bonds would be discounted by 14% (rounding off), Irish bonds 13%, Spanish 12% and Greek bonds by 23%.

They are all smoking some very good stuff to think that Greek bonds would trade at 77 cents on the dollar.

The European Debt Crisis - See Complete Coverage

To repeat, the panic in the market that brought about the demand for the stress test was the fear of a country going belly up.

What this test is effectively saying is that the EU will not allow a country to fail. Ok, maybe it'll work for one country.

But what if two, or more, are threatened? There aren't enough Euros to go around.

If these test results were the reason for last Friday's rally, look for that rally to fade. This test isn't a joke, but the "school" administrators made sure there would be no irate parents marching into the office demanding their kids be passed. But it doesn't mean the kids are ready for grad school.

And Tim Geithner should stay away from tax debates.

Tough to do as Secretary of the Treasury, but then it was tough for him to say his personal tax dodge was really a big accident. Yea, right, an accident. Timmy said the other day that the "White House would allow taxes on top wage earners to increase in 2011 as part of an effort to bring down the US deficit. He said the White House plans to extend expiring tax cuts for middle and lower income Americans, and expects to undertake a broader revision of the Tax code next year".

And from the horse's mouth came, "We believe it is appropriate to let those tax cuts that go to the most fortunate expire." Most fortunate? Like I got lucky and was born well and haven't worked for over 40 years so I could achieve my piece of the American dream. I was/am fortunate to live in the greatest country in history. I was fortunate to have been given half a brain (wish I could find the other half!). But don't tell me I should be taxed because I am fortunate. Tell me I'm to be taxed because my voting block is too small to sway the pols in Washington. Tell me I'm to be taxed because, hell, you have some money and we want it. That I understand. I disagree, but I understand.

What nags at me the most is that Tim might believe his own B.S. This administration needs a few entrepreneurs/business people to get a balance.

This coming Friday we'll get a look at the GDP for the second quarter. I'm hoping for 3% plus, but I fear 3% minus. Mid-week we will get the Fed's beige book, which Art Cashin and I like to call the tan book. That's what it used to be called and I'm becoming more retro every day. Some say I'm retreating into old age dotage, but what do they know? There is nothing wrong with calling the GE building the RCA building, or the Met Life building the Pan Am building, and you will not find a born-to-the-city New Yorker who will ever utter Avenue of the Americas for 6th Avenue. And Houston is not Houston: it is pronounced House-ton. Ask any cab driver.

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Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.