Obama May Be Stressed Out

Despite the serious misgivings about the bank stress tests, the NY Times reports that the Obama administration is planning to reveal data about all 19 banks in an effort to avoid stigmatizing any individual ones.

The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest.

While all of the banks are expected to pass the tests, some are expected to be graded more highly than others. Officials have deliberately left murky just how much they intend to reveal — or to encourage the banks to reveal — about how well they would weather difficult economic conditions over the next two years.

As a result, indicating which banks are most vulnerable still runs some risk of doing what officials hope to avoid.

Yesterday's move by Goldman Sachs to sell stock in order to raise money to pay off its TARP bill prompted this morning's report.

Goldman’s action has put pressure on other financial institutions to do the same or risk being judged in far worse shape by investors. The administration feared that details on healthier banks would inevitably leak out, leaving weaker banks exposed to speculation and damaging market rumors, possibly making any further bailouts more costly.

The Goldman move also puts pressure on the administration to decide what conditions will apply to institutions that return their bailout funds. It is unclear if Goldman, for example, will continue to be allowed to benefit from an indirect subsidy effectively worth billions of dollars from a federal government guarantee on its debt, a program the Federal Deposit Insurance Corporation adopted last fall when the credit markets froze and it was virtually impossible for companies to raise cash. In ordinary times, regulators do not reveal the results of bank exams or disclose the names of troubled banks for fear of instigating bank runs or market stampedes out of a stock. But as top officials at the Treasury and the Federal Reserve Bank focused on the intensity with which the markets would look for signals about the nation’s biggest banks at the conclusion of the stress tests, the administration reconsidered its earlier decision to say little.

So now, Obama is in a jam and in a bad one to boot, and one I predicted he would be in some time ago.

If the banks all pass the test with flying colors, nobody's going to believe him. If he reveals just how insolvent the banks are, it's panic time. If he reveals some banks are more equal than others, then it'll force some banks into recievership as they lose customers and deposits. I've argued that the last point there is the perfect cover for Plan N, but Obama seems more and more determined to take the first option instead, revealing as little substantial information about the banks actual health and depending on wishful thinking to get us out of this mess.

Now having said that, it's entirely possible that the stress test having been publicly revealed to be a sham at this point, Obama has no choice now but to divide the banks into solvent and insolvent and kick in Plan N on the losers.

Then again, he could just pretend they're all fine like the guy on NPR this morning. If that happens, batten down the hatches.