Stressing Over Bank Stress Tests

By admin on February 1, 2010, 11:54 pm

The anguish and peril of bank stress tests. What once seemed like such a good idea, like maybe the bailouts, has turned into a public relations nightmare. When and how can the stress test results, which have already been delayed by weeks, be released so as to not cause more alarm and concern. Is that even possible given the reality of the financial markets today? 

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions. The ones that are more healthy than others want to give the bailout money back. For some reason banks took money thinking there would be no strings attached.

Are you serious?  

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements, people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure. Timothy Geithner sure doesn’t want to do it.

No one really wants to be the messenger!

The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers. May be punished? Bailouts seemed like such a great idea once upon a time. And the stress tests seemed logical three months ago. But who would have thought that there might have been some downsides to all this bailout money?

“There are plenty of ways to go wrong here,” said Wayne Abernathy, executive vice president of the American Bankers Association in Washington. “It might have sounded good at the time, but now looking back, it has far more risk than benefit.”

The banks haven’t been consulted on how the information will be released and have raised the issue with the Treasury, three industry officials said. Why would anyone think that the Fed needs to or even wants to consult with the banks. It’s all about control which is why the more healthy banks now want to give back the money. The government has come up with three basic principles before “allowing” banks to pay back the money!

There’s even strings attached to paying back the money!

First to “make sure the system is stable”. Second,  not create “incentives for more de-leveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”. In other words, once the government has their fingers in your business, they are in control and they will decide what you can and cannot do.

May 4th cometh! 

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