Tuesday, April 28, 2009

Roubini Says U.S. Stress Tests Not ‘Serious,’ Banks Insolvent

By Carlos Torres

April 27 (Bloomberg) -- A persistent recession and mounting unemployment will leave the U.S. financial system “insolvent,” implying the stress tests performed by regulators weren’t rigorous enough, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis.

Losses at U.S. banks and broker dealers will swell to $1.8 trillion, almost 100 percent more than the current amount, as the economic slump lasts at least through this year and the jobless rate climbs to 12 percent by 2010, Roubini said today at the CFA Institute’s annual conference in Orlando, Florida.

The losses would exceed the $1.4 trillion in capital that banks currently have, meaning “the system in the aggregate looks insolvent,” Roubini said.

The rate at which the U.S. economy contracts will diminish from the 6 percent annual pace in the fourth quarter to about 2 percent in the last three months of 2009, he said. Still, Roubini estimated the jobless rate will reach 11 percent by the end of this year and keep rising as companies retrench.

Policy makers assumed the rate would reach 10.3 percent in 2010 in the “more adverse” of U.S. regulators’ two scenarios in the stress tests to determine how much capital banks may need over two years.

“The stress tests are not really serious,” he said, predicting even the more adverse outcomes predicted by officials will be overtaken by events.

To contact the reporter on this story: Carlos Torres in Washington at ctorres2@bloomberg.net
Last Updated: April 27, 2009 12:22 EDT

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