Majestic wonder

One of the most momentous and world impacting events of the 21st century occurred last week when Blink 182 reunited and took the stage once again. It included the usual incredibly choreographed and executed dance moves, poetic interludes and quaint heart wrenching double-necked guitar solos. All the hallmarks of punk rock mastery was there- most importantly perhaps telling the nation’s largest wireless carrier to go suck it, or how they’re planning High School Musical 5: The Tour.

Travis Barker is one of the most intense and effortless drummers to ever get behind the kit, Hoppus is a workaholic bassist and becoming a versatile producer, and Tom Delonge’s name rhymes, and when he wants can be one of the most irreverent and sensitive lead singers to ever strap one on. I have night sweats about turning into someone who goes to see John Foggerty or Styx 3-5 decades after their prime, where a concert feels like some previous generations’ past rock anthems were preserved on a slide and endlessly replicated in some tour promoter’s lab experiment, but Blink’s not there yet. Thomas is only 33 and still looks like he wants to push the boundaries, and they still have the youth to record new edgy, violent stuff.

Blink going on hiatus was unexpected, but I can’t help but feel they all got better in the interim. Travis started doing beats and drums with DJAM, and if there were any holes in his rhythmic Chinese wall he certainly plugged them. Mark became more of a musical philosopher, dishing out impressively thorough and researched podcasts and blogs while also becoming a producer. And Tom explored new synth sounds and still better dance moves. And I don’t think it’s a coincidence that Blink broke up within a month of George W. getting re-elected, when Tom’s brother was fighting in Iraq. It clearly permeated his playing and writing the next several years, and I don’t think them reuniting within a month of Obama taking office is random either. Blink springs eternal. But maybe I’m thinking too small. God himself may have reunited Blink. In the course of just a couple months, their long-time producer sadly died, two of their best friends were tragically and horrifically killed, and Travis literally walked away from a freakish plane crash. It was a reminder that sometimes there are causes and connections bigger and more important than you’ll know. That sometimes doing something because it feels right and good and crazy is enough, and maturity means often being okay with emotions, drama, egos and doubt- the hallmarks of immaturity. That you can still love people while you’re hating them. I guess this is growing up.

Stress Testing

Banks do stress tests all the time, you can’t plan for what you don’t understand or measure. And banking supervision is a full-time job. Balance sheets change in value daily, new assets come on the books daily, and the economy is fluid. Banks have full-time examiners who are continuously measuring their loan levels, estimating the potential loss exposure, and then requiring loss reserves accordingly. So the idea that these stress tests were rolled out as a big bold new policy, and then so publicly announced, seems off-base and represents an unnecessary policy risk.

One, the necessity of these “new" tests just show that the regulators failed to begin with, that they didn’t even know the basic exposure of the banks in the first place, and still didn’t. And two, the whole basis for the test is to prepare for contingencies, things that haven’t and very well may not happen. Like a “stress” case and a “worst” case. Chairman Bernanke characterized these cases as “unlikely”, yet they are the basis for requiring firms to raise more capital, either by selling off potentially valuable assets (like Citi did with its Japan brokerage), diluting existing shareholders by converting government loans to common stock, or by taking on more debt. All things that shouldn't be done simply because of unlikely assumptions. In addition, the tests created significant anxiety and hurtful market expectations for weeks preceding the tests. Once the results were leaked and it was clear the banks already had the ability to close the so called gap, the market cheered accordingly. But what if the gap was much larger, then this policy would have created a panic of sorts, causing many funds and investors to dump financials further- tangibly hurting the bank’s ability to raise capital, all because of hypothetical and “unlikely” assumptions about capital they might need should the situation deteriorate. Except that the reason for the deterioration could have been the anxiety created from the tests themselves. Thank goodness the banks had been stockpiling money for months anticipating this- if the gap had been larger this stress test would have just set back a huge rally by throwing its full weight behind assumptions and creating a self-fulfilling prophecy. To minimize this risk, the tests should have been called simulations and been completely internal between the supervisors and banks, so regulators could know exactly how much capital to inject under worsening conditions, and the banks could come up with a plan to execute in such an event. Instead, by forcing the banks to raise the money automatically, and practically broadcasting every discussion with the world, it was akin to evacuating a theatre full of people just as the curtain starts to rise because, well there’s no fire- but there could be.

This policy was a big roll of the dice and continues to show the youth of Treasury Secretary Geithner. These sorts of tests should not be confused with reality, and should be routine functions of the supervisors, not spectacles we all hold our breath for. Additionally, why they used tangible common equity as the definition of capital and not Tier I has yet to be answered. The big banks have 10%+ of capital they could access, but only about a third of it is common stock (considered a safe liquid asset). So, these tests probably understated their true capital level by about 70%. I’m glad this turned out as well as it did. But it’s only because we lucked out and didn’t have a full stampede out the door when the government yelled “fire!” in a crowded room.