Term Sheet

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

Goldman and JPMorgan officially pass stress test, says Fed

December 2, 2013: 5:41 PM ET

Federal Reserve's big bank stress tests go secretive.

130415091638-goldman-sachs-earnings-620xa

Clarification: 12/3/13

FORTUNE -- Goldman Sachs and JPMorgan Chase pose no threat to the economy. How do we know? Beats me.

Late Monday, the Federal Reserve said that the two giant banks had officially passed their annual stress tests. The actual tests, which are supposed to assess whether the nation's biggest banks could survive another financial crisis, were conducted late last year. The results were initially released in March. Nearly all of the 18 big banks that were tested passed.

But for the first time this year, the Fed not only tested whether the banks had enough capital, but if their methods to determine how much capital they needed was good enough. Seems "high enough" was apparently not an acceptable answer. Goldman (GS) and JPMorgan (JPM) passed the first part of the test, but bombed the second part.

MORE: Goldman Sachs still earning its money in soon-to-be-banned ways

The weird thing, though, is that the Fed has never said what the issues were. I tried to find out at the time the test results initially came out. The best answer I could get for Goldman was that it was secretive on how it measured what assets it considered risky and what assets it deemed safe. The risky assets figure is a key input that the Fed uses to figure out how much capital you need to have.

For JPMorgan, the answer seemed to be London Whale, duh. And that actually seems like a pretty good answer because not knowing you are at risk of losing $6 billion might lead you to misjudge how much capital you need.

Still, who knows? All the Fed said on Monday was that the two banks had been asked to resubmit their plans due to "weakness identified in their capital planning process." They did. And they now have passed.

And yet, it's not clear our banks are any less risky. Take Goldman. Last quarter, the firm reported a $1.3 billion loss related to currencies, although that loss was offset elsewhere. Overall, the firm had a profit. Still, such a large loss in one line of business during this summer's relatively small market hiccup could suggest why the government had an issue with the way Goldman was determining how risky its assets were. Again, if the Fed did, which I don't know.

MORE: Bankers that did the deals that lead to JPMorgan's $13 settlement doing just fine

Initially, the point of the stress tests were to reassure the public that our banks were healthy. The Fed would release a whole bunch of numbers proving banks were safe, and that would build confidence. And it worked at the height of the financial crisis.

It worked so well that Congress decided it would be good to do it every year. But what was once a big public display of numbers has morphed into something else. Now banks fail for reasons we don't know, and then pass for resolving those unknown issues in ways we don't know. Feel safer now?

Clarification: An earlier version of this story said that Goldman had a $1 billion trading loss in the third quarter. In fact, Goldman lost money in one area of trading. Overall, it made money. Also, an earlier version of this story said that Goldman failed its stress test. Actually, the Fed gave Goldman a temporary pass, and required the firm to resubmit its results before the end of the year.

Join the Conversation
About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

Email | @stephengandel | RSS
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.