Wednesday, 6 May 2009

Stress tests and financial spin

The leaks today regarding the stress tests and how they impact on Bank of America (BAC) are a wonderful example of good spinning (whether by design or by accident).
The first reports were greeted with a bout of selling in the pre-market and lots of earnest bloggers ready to tell their followers that maybe Armageddon was back on the agenda. After some further percolations through the blogosphere and CNBC etc. it now appears that the news is a positive for BAC as they already have raised most of the capital they need - and through a wonderful sleight of hand involving the way that Tangible Common Equity (TCE) is actually measured - the stock is now moving up.

Confusing... that was the whole point.

The essence of such first class spin is that the signal/noise ratio is calibrated to create the maximum ambiguity. Then the markets are tricked into believing that they have not, in fact, already discounted the news appropriately.

Whether they then go on to discount it appropriately is a different matter and can take a lot longer to manifest itself.

The big concern of course is whether those doing the spinning are as clever as they appear and whether they really know what's going on.

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