Testing The Stress Tests

At fisrt glace, this Bloomberg story looks like more maddening Obama administration obfuscation on bank stress tests.

The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, people familiar with the matter said.

The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.

“If you allow banks to talk about it, people are just going to assume that the ones that don’t comment about it failed,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

But Miller has an important point: all the stress test results should ideally be released all at the same time. I've said as much myself.

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.

However, it's a moot point if the bank stress tests are all nothing but bullshit. That's where we are right now. The more I see stories like this hinting at the prime importance of the stress tests, the less I believe the tests are meaningful at all.

[UPDATE] A good read from Bloomberg's Jonathan Weil about this subject, and it is not a kind article at all:

And now, six months into the government’s Troubled Asset Relief Program, his administration’s approach to the financial crisis is largely indistinguishable from its predecessor’s. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.

And the thing is I can't really defend Obama's position, either. He has taken the Bush position, and unless this bear market rally really is the beginning of a new bull market and a massive, V-shaped rebound recovery (and there is ample evidence it is not) then we're all in terrible trouble when the economic airplane noses down towards the ground again.

Magical thinking that the economy will correct itself will not solve this problem.