Fed Goes Oops on Stress Tests

The New York Times reports this morning that the Fed's stress test contained errors in the classification of losses in  Table 4, on page 32  of the report.  This is the table that I discussed in the previous post, and it's certainly disappointing that a high-powered organization like the Fed can't get these calculations right the first time.

It's also interesting to note that JP Morgan jumped on its positive stress tests to front-run the Fed by issuing its own press release.  This made sense, since JPM looked proactive and focused in defending its reputation.  By contrast, I looked around on the Citi website a few minutes ago, expecting to find prominent, flashing red lights pointing to a press release.  This release would have affirmed management's view that the initial test results were below expectations of the management and those of it its expert consultants.  It turns out Citi  had a point, but I couldn't find a press release. Disappointing.

There's another interesting line in  the table which purports to quantify the "Trading and Counterparty Losses" to the 19 bank holding companies from the use of derivatives for hedging risks.  In the original bailout, one of the justifications was that total global losses from a cascade of counterparty claims were incalculable and would bring the system down.  Now, in the case of a somewhat drastic economic scenario, these losses seem to be quite measurable, and they definitely do not bring down a system driven by these 19 systemically important financial institutions.  The Trading and Counterparty Losses shown range from $21 billion to $27 billion, affecting Bank of America, JP Morgan Chase, Goldman Sachs, and to a lesser extent Morgan Stanley.  I wonder what has changed in the world of derivatives that the formerly unknown has become known and manageable.