The Fed wrote down 28-38% of the value of their Bear Stearns mortgage portfolio. The rest of the banks are carrying the same securities at 90+% of their face values. Who’s zooming who?
Fannie and Freddie saw mortgage delinquencies rise 50%.
Banks are carrying most loans at 90+% of their face value.
If the stress tests don’t make real assumptions about the starting capital, how can they really diagnose the banks in a theoretical environment of deterioration? If their portfolios drop another 5% does that force a 5% markdown or a 30% markdown to catch-up to reality?
It’s hard not to be cynical.