How Plan N Might Go Down

Eric Dash at the NY Times posits that Timmy's "bank stress test" could be cover for Plan N.

Regulators plan to assess the potential losses a bank could face over the next two years, rather than the typical one year, according to government officials close to the situation. They are also expected to look at banks’ exposure to derivatives and other assets normally carried off their balance sheets, and make sure that banks also carry an additional capital cushion. Their assumptions will be guided on a “worst case” basis.

The exams could be used not only to determine which large banks would receive additional aid but also to help weed out small, unhealthy banks, hastening consolidation in the industry.

Analysts said the program hints at a creeping nationalization of the banking industry. “There is no way you can survive the failure of the stress test without having the government inject large amounts of taxpayer money,” said Jaret Seiberg, a policy analyst at the Stanford Group in Washington. “That means the government will own a majority of the bank.”

Paul J. Miller, a longtime banking analyst with Friedman Billings Ramsey, said the test might provide the government with political cover to take a more heavy-handed approach. “It gives them the mechanism they need to take giant steps with capital infusions,” he said.

“Maybe the thought is that we will put in so much capital that even under these stringent circumstances, this bank will not fail,” added Martin Lowy, a banking lawyer who advised the Federal Deposit Insurance Corporation on troubled banks during the savings and loan crisis of 20 years ago.

“That will take a huge amount of capital if they are going to do it honestly,” he said. “Why that is different from nationalizing, I don’t know.”

This does seem to be a logical way to implement Plan N from both a political standpoint as well as a financial one. Over at CalcRisk there's an excellent argument as to why the key to Plan N is to both complete the "stress test" quickly (in say 30 days) and then publicly announce the results:

Just to repeat, the key lesson in crisis resolution is transparency. I hope the results of the bank stress test will be made public, and the zombie banks clearly identified.

There's the rub. Will it be politically feasible to publicly call out America's largest banks as zombies? I don't think there's any other way to do it, and that actually might be Obama's trump card.

If Obama keeps the results of these stress tests secret, then the rumors will leak and seriously harm the banks. If however he releases the results for all banks simultaneously, he can then implement Plan N on the worst offenders while identifying "safe" banks at the same time.

If either the list of safe banks or the list of truly insolvent ones leaks before the other, the markets will eat all the banks alive.

This would at least give Obama cover for Plan N.