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Stressing About the Stress Tests

Anthony Randazzo
May 4, 2009, 5:15pm

Stress tests: the gauntlet of hoops and sprints that the government has made the 19 largest US banks run/jump through over the past weeks, auditing and running economic models. Its all about trying to figure out which banks are solvent, and which ones will need more taxpayer cash to survive. These audits aren't inherently a bad thing, but I'm uncomfortable with what the government plans to do with its new information.

Some banks have cited fears that the release of stress test results will reveal who is weak and who is not to the detriment of some--though that is the whole point. And if a bank can't survive without government support, then there is certainly something wrong with the way that institution is being run. 

There are others who think the tests are a government excuse to give out more bailouts, but since when have they needed to go to such lengths to spend already allocated (TARP) money. And even as of today, the Treasury Department has said they might be able to continue to save the banks by just using the TARP cash.

I think the real problem is that the government will be using the results of these tests as a baseline for forcing firms to take more government money or at the very least not return the TARP cash so that Treasury can keep the financial institutions under their thumbs.

As it stands now from leaked stories, government regulators have told Wells Fargo they don't think the bank has enough money to survive. If this is confirmed Thursday it will mean the bank will have to raise a specified amount of cash by a certain date or be taken over by the government.

Meanwhile Bank of America and Citigroup are expected to be asked to do the same, but to the tune of $10 billion each. The Financial Times is reporting that the two banks are trying to convince the government that they know their balance sheets better and don't need to give away more ownership of their companies to investors or have the government tell them when to sell assets.

Citigroup has been making moves on its own (as much as they can do anything on their own with the Treasury holding purse strings), such as selling its Japanese assets to Sumitomo Mitsui Financial Group for $5.56 billion. This is a way of raising capital, unloading major assets. And its what the government will want the banks to do if they are deemed unlikely to hold up under "stress" (i.e. a deepened recession or depression). But if banks are forced to sell assets before they want to, it might be that they aren't getting full value. Or if they wait too long to sell, and it hurts them then they should suffer the consequences and fold.

The government testing and subsequent demands on banks will be liked by many who want to see the banking sector cleaned up and the financial giants stabilized so we can get back to life as we knew it before. But Treasury suggestions are likely to cause problems, just as the free market's means of correcting itself can be uncomfortable for out fiscal pain-tolerance levels. 


Anthony Randazzo is Director of Economic Research


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