It's a whole new wrinkle on the old joke about accountants (when asked what 2 + 2 is, he or she replies, "What do you want it to be?").
The Wall Street Journal reported yesterday that the reported results of the financial institution stress tests were negotiated:
Banks Won Concessions on Tests
Fed Cut Billions Off Some Initial Capital-Shortfall Estimates; Tempers Flare at Wells
The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.
The overall reaction to the stress tests, announced Thursday, has been generally positive. But the haggling between the government and the banks shows the sometimes-tense nature of the negotiations that occurred before the final results were made public.
It's also clear that the negotiations were over clearly non-trivial amounts:
At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks' ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions.
..... Bank of America's final gap was $33.9 billion, down from an earlier estimate of more than $50 billion, according to a person familiar with the negotiations.
..... Wells Fargo's capital hole shrank to $13.7 billion, according to people familiar with the matter. Before adjusting for first-quarter results and other factors, the figure was $17.3 billion, according to a federal document.
"In the end we agreed with the number. We didn't necessarily like the number," said Wells Fargo Chief Financial Officer Howard Atkins. He said the company was particularly unhappy with the Fed's assumptions about Wells Fargo's revenue outlook.
At Fifth Third Bancorp, the Fed was preparing to tell the Cincinnati-based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion. Fifth Third said the decline stemmed in part from regulators giving it credit for selling a part of a business line.
Citigroup's capital shortfall was initially pegged at roughly $35 billion, according to people familiar with the matter. The ultimate number was $5.5 billion. Executives persuaded the Fed to include the future capital-boosting impacts of pending transactions.
Given the size of the change at Citi, it seems odd that the Journal's David Enrich, Dan Fitzpatrick and Marshall Eckblad mentioned it so late in their rundown.
It's also more than a little strange that the name of Treasury Secretary Tim "Tax Cheat" Geithner, who is credited with designing the stress test, never appeared in the Journal's coverage. In fact, the word "Treasury" doesn't appear in Journal report, even though other sources, including the one to be cited next, indicate that the 150 regulators thown into the exercise were from the Treasury Department. But the Journal treated the stress test entirely as an enterprise of the Federal Reserve.
It's all too easy to forget that the stress test is part of a bigger Geithner/Treasury plan that is very ominous to those who believe in free markets, as the UK Telegraph reminded us on Thursday:
Geithner's stress tests likely to prove too little too late
..... The FSP (Geithner's "Financial Stability Plan") consisted of three parts – a "comprehensive stress test" of America's largest financial institutions, the creation of a public-private investment fund, and up to $1 trillion (£668bn) to support consumer and business lending.
Somehow, I think that if a presidential administration other than Dear Leader Barack Obama's was involved in negotiated financial reports like the stress tests have turned out to be, we'd be hearing a lot more about how "arbritrary" and "meaningless" the results are.
There's also this: I know it's considered impolite in the Dear Leader Era, but the fact that Treasury regulators were testing the health of banks onto which they have forced government investment, from which they are in many cases refusing repayment, and with which they are "negotiating" the terms of specific business transactions such as the Chrysler bankruptcy and the General Motors mess, presents conflicts of interest and independence, not to mention potential for breathtaking corruption, that no investor or taxpayer should tolerate. Oh well ....
Cross-posted at BizzyBlog.com.