Stress tests….Is the treadmill going fast enough?….

(Banks speaking to the auditors)…..

Stress…What stress…I feel fine…just give me a minute to catch my breath…get your hand off that start button or I’ll…….

A lot of people seem to be breathing a sigh of relief since the release of the so called  “Stress Test Results” were released. However no one seems more relived than the banks themselves.

It reminds me a lot of the old days when I was in the Food Industry. You are under the inspection of the USDA on a daily basis. Your local inspector kept tabs on what you were doing, and made sure you were following procedures and laws accordingly. But…and here’s the big But…If you had any type of problem that resulted in a recall or equivalent, you would have a detailed inspection from department heads and their bosses, and would be put under a microscope, if not an electron microscope for possible defects in any of your previously approved regulations. This could result in fines of Hundreds of Millions of Dollars for certain violations, if not the complete liquidation of the company. ( Remember Sara Lee approximately 10 years ago?)

Don’t get me wrong, I’m not arguing against the regulations or fines ( That’s another column) what I am stating is that they were merciless in looking for flaws or possible breeches in protocol to insure the “Public Safety of the Food Supply”…Agree with them or not, I have been on the record both in public and private meetings stating…” We have the safest, and the best food supply chain that is the model, and currently the envy of the world.” I state that because no matter what challenges arise within the food industry, the so called “Stress Tests” that are put on after, push the industry to higher standards, not just to give a passing grade.  Passing to some  can be C- or worse D+ so passing is a relative term. That’s not so for food. A is truly the only passing grade…if you’re company  is a B-, rest assured you will be prodded to get that B to an A, and soon!

If you look at the data from the banks with a prying eye, you’ll notice it doesn’t appear to look all that stressful. What is truly stressful to the financial system? A test from a body of auditors that want you to pass…Or from the auditors that are trying to see where the true breaking point might be.

Here’s my case in point. Just on this scenario you be the judge…..A bank loans money to a company that builds a Strip Mall…He in turn rent the space to business owners….they in turn sell their wares to the public..which is You…………..You no longer shop there……The store owner doesn’t have money now to pay the rent so he skips the rent….The mall owner doesn’t have anyone to rent the store out to so he lets the business stay without throwing them out because it’s better than being empty…He now can’t make his mortgage payment so he skips his payment…The bank now moves his loan from one page of his books ( Performing loan ) to the other page ( Non performing loan )…but what is the value of the loan?..100%…50%….10%….Zero?

It’s 100% as long as one still has Hope that they will be paid…but as the treadmill starts to get faster..or time passes faster, or longer…the closer Zero becomes more relevant.

Instead of looking at the treadmill, we had better make sure we’re not going to let those running shoes drop before we get off. Then the speed wont be relevant any longer, and we had better hope there’s a dead man switch attached to our clothing!

Mark