Wall Street Colludes To Avoid Being Tested

One of the great teachers of my childhood used to quote Socrates, saying, “the unexamined life is not worth living.” If only Wall Street felt the same way. Apparently, major firms on Wall Street are thinking about getting together to legally challenge the right of the Federal Reserve to force the banks to undergo the annual “stress tests”. Their biggest complaint is that the Fed changes the parameters of the test every year so that they never know what disastrous scenario will need to be simulated. Of course, that’s the way tests usually work. The Fed knows the people they are regulating quite well by now and correctly point out that the banks would be more likely to game the tests if they had more knowledge about the models to be simulated beforehand. After all, gaming the system is how Wall Street created the greatest financial crisis since the Great Depression. And, as Kevin Drum points out, doesn’t discussing strategies for suing the Fed with your supposed competitors amount to some sort of collusion. It probably is illegal collusion but we all know no one will go after them on it.