For those who believe the recent rally in the markets signal the slaying of the bear, I present to you (and for my own reference too) a post from John. P Hussman of Hussman Funds (h/t The Big Picture), tasty bits only (my comments in italics, full article here):

Dexia had little more than 1% in tangible equity behind its assets, “Dexia nonetheless managed to show a capital ratio of 12.1 percent. Dexia got that ratio mainly by excluding the bulk of its assets — a process speciously referred to as risk-weighting –along with billions of euros of pent-up losses on soured holdings such as Greek government bonds. The denominator in the ratio got smaller, the numerator got bigger, and Dexia wound up looking like one of Europe’s safest banks… The takeaway here is you can’t believe anything about regulatory capital benchmarks, in Europe or elsewhere, stressed or not. It’s a lesson the world should have learned long ago, yet keeps relearning.”

It would be funny, if not so distressing, that the day before Dexia failed, the Italian bank Intesa Sanpaolo presented a chart showing that it ranked among the top 4 in the European stress tests, versus 20 of its peers. The top bank on the list? Dexia.

Stress tests worth shit (not like this is anything new)

As we entered 2008, I put together a spreadsheet to track financial institutions that were of particular concern based on their gross leverage (the ratio of total assets to the institution’s own capital), and the ratio of tangible equity to total assets. The most leveraged institutions at the time were Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, and Lehman Brothers. That spreadsheet turned out to be a fairly good predictor of the institutions that would either fail, go into receivership, or require bailouts as a result of insolvency.

Ok, they’re dead (at least in their previous incarnation) already, so what?

The corresponding calculations for several major European Banks are below.

oh shit.