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Will Bank "Stress Tests" Kill Market...or Government Credibility?

Posted Apr 20, 2009 02:04pm EDT by Henry Blodget in Investing, Recession, Banking
Related: xlf, dia, spy, bac, wfc

Believe it or not, the "stress tests" that the government is performing to see how that banks will do if the economy continues to get worse were originally intended to inspire confidence.

The government would subject the banks to all sorts of horrifying scenarios, the theory went, and it would then report that the banks had passed with flying colors--thus reassuring a nervous public that the financial system was sound.

Alas, from the beginning, the stress tests weren't stressful enough.  The government then said it was planning to withhold the results of the stress test to avoid harming the bad banks--which defeated the whole purpose.

Josh Rosner, managing director at Graham Fisher, is as frustrated as many analysts with the flaws of the stress tests, but he hasn't lost all hope.  Rosner cites two key dates: Friday, April 24, when the government will reveal details of the tests, and May 4th, when some "results" will be revealed.  He says he hopes the tests will force the government to begin to differentiate between strong banks and weak banks, which he thinks is critical to the recovery process.

"The severity with which we actually handle those institutions that are most sick as a result of this will define the credibility of the administration’s approach," Rosner adds.

 Meanwhile, if the government just announces that all banks are in robust health, its credibility will be destroyed.  So there's a lot riding on those results.

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