John Hussman has another great weekly letter this week, with many salient points. Read the whole thing and you won’t be disappointed.

Here are a few choice quotes:

Banks Pass Stress Test – Regulators Fail Ethics Test

Last week, financial stocks enjoyed a powerful advance and short squeeze on the announcement of the results of the ?stress test? of major banks. It is important to begin by noting that this was not a regulatory procedure with teeth. It was initially a response to Congressional demands to introduce greater objectivity into the use of public capital for these bailouts, and gradually morphed into nothing more than a ?confidence building? exercise. And keeping with the emphasis on keeping the numbers happy, as opposed to providing full and fair disclosure, the Wall Street Journal reported on Saturday, ?The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation’s biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining. In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.?

…Now, just think of this for a minute. Even if you assume that the ?risk-weighted assets? of the banks are about two-thirds of their total assets (as the stress-test does), we’re still looking at $7.8 trillion in total assets at risk in these banks, and despite being on the edge of insolvency only weeks ago, we are asked to believe that they will need less than 1% of this amount ? $74.6 billion ? of additional capital even in a worst case scenario…

…Of course, Citi’s entire market cap is only $22 billion, so the ?$5.5 billion? that Citi is reported to need under the stress test is what it would require after a 5-to-1 dilution in its common stock (87+22/22). Essentially, we’ve got a company with a common equity buffer of just over 1% of total assets, that just 8 weeks ago was on the verge of receivership, and investors are urged to believe that there are enough voodoo dolls in the vault to make the company solvent even in a further weakened economy.

Hussman delves into more of the mechanics of the math, but arrives at this logical conclusion that everyone should have if the stress tests were actually to be believed:

Great. Then no more government money should be needed. Outstanding. Not a dime more of public funds beyond what remains in the TARP. No need to use public money to buy toxic assets either.

I for one heartily agree.