NOTE 1 I can't imagine why Yves isn't on every A lister's mental check list for a quick hit early in the morning, every morning, so she could get some traffic from left blogs other than obscure C listers like this one. Yves knows her stuff cold, she's a great writer, she's mastered the narrative, and she's she's a fucking Cassandra who could use the help. Could we stop the completely dysfunctional stovepiping between poliblogs and econoblogs, please? There's a discipline called political economy, see, and it has that name for a reason. And it doesn't originate at the Chicago School. -- lambert

Massive takedown:

Details on Banks' Victory Over Treasury in Stress Tests Emerge

It was bad enough that the Treasury came up with an adverse case that is hardly a worse case scenario. As we pointed out, it is considerably more optimistic, both in duration and intensity of the downturn, than is typical for serious financial crises. ...

The tests also did not sufficiently allow for the just-started commercial real estate downdraft, nor did they probe the exposures most subject to sudden decay, namely, complex securities and derivative exposures. Those are big risk factors at the firms with large credit trading operations namely the former investments banks (Merrill, now part of Bank of America, Morgan Stanley, Goldman) plus the banks that have made successful entree into the big leagues, Citi and JP Morgan. And there was no examination of the risk management models and practices, nor sampling of the underlying loan books....

This is the legacy of regulators who are so subject to what Willem Buiter's "cognitive regulatory capture" that the believe the Wall Street party line, that they are the best and the brightest, and therefore are better judges of how to manage their affairs than any outsider. Despite ample evidence to the contrary, plus the danger of giving hungry organizations a taxpayer backstop, the Treasury has shown a predictable lack of resolve, completely in keeping with its industry-favoring posture.

That's the good part.

The most disturbing revelation comes via the Financial Times:

US banks have been given government assurances they will be allowed to raise less than the $74.6bn in equity mandated by stress tests if earnings over the next six months outstrip regulators’ forecasts, bankers said.

The agreement, which was not mentioned when the government revealed the results on Thursday, means some banks may not have to raise as much equity through share issues and asset sales as the market is expecting. It could also increase the incentive for banks to book profits in the next two quarters.

So get this: the official releases on the stress test results and process weren't honest and complete. We basically have the real deal, which is the unwritten understanding between the Treasury and the banks, [like a "side letter"] versus the phony version presented to the public. And if we can't even believe the headline number in the tests (the amount of money they are supposed to raise), is there any other aspect we can trust? How many other winks and nods were there between the Treasury and banks that weren't leaked to the press?

And in case you missed it, the phrase in the FT, "increase the incentive for banks to book profits in the next two quarters" is code for "fabricate earnings". Per below, there were quite a few instances of permissive accounting this quarter. The powers that be are inviting more of the same. And this is all in the name of boosting confidence.

Well, for the banksters, "confidence" == "impunity." So what's not to like?

NOTE 2 I respect Bowers tremendously, but this is not even wrong:

I am not going to pretend to know whether or not the tests are just bullshit. What I do know is that they better not just be bullshit, or there will massively negative political consequences for the entire Democratic Party as a result. If it turns out that way more capital is needed than these tests forecast, and the economy doesn't recover very quickly, then the "stress tests" will be viewed as a blatant case of either administration incompetence and / or mendacity. The result will be Democrats losing in droves--probably even those who opposed the bailouts--pushing our congressional majorities back to around 2007-2008 levels.

If this were any other topic, "I am not going to pretend..." would be received with derision, and rightly so. ("I am not going to pretend to know whether Colin Powell spoke the truth at the UN.") And since when did blogs refrain from proferring opinions? In any case, there are plenty of people who can explain, so that you do know. Why not invite Yves in for a guest post? Or Simon Johnson or James Kwok? Or Rithholz? They are one and all excellent bloggers, experts in their fields, do know it's bullshit, and can explain why.