Bank Stress Test Seen As Political Move

The results of the "stress test" for the nation's 19 financial institutions are due to be disclosed on Thursday, but ever since last Friday "people familiar with the test" and anonymous officials as well as financial analysts have been dribbling the numbers. First, it was only one bank out of 19. Then 2, 4, 14, 10. Warren Buffet has said the test doesn't mean much. The once-Dr. Doom, now calling himself Dr. Realist Roubini has said not to believe it. Every time the name of the bank comes up who needs to raise capital, that bank stock shoots up (e.g. Wells Fargo the other day and today, Bank of America today).

Here's an AP article on the issue, and it raises several valid points:

The stress test is not really to test the health of financial institutions, but it is basically a PR event:

"Regulators and internal auditors routinely use stress tests to manage bank risk. The tests, typically done in private, help guide investments and ensure the banks' stability. Normally, regulators disclose their evaluations and remedies with banks behind closed doors. By contrast, critics say, the Fed's approach seems designed for public consumption."

"One-size-fits-all" approach is not the right one to actually assess the health of the diverse set of financial institutions:

"Providing more information about the health of banks is a worthy goal, said William Seidman, who ran the Federal Deposit Insurance Corp. during the savings-and-loan crisis. But he said the best way to do so would be to tailor the tests to each firm. Among the 19 firms being stress-tested are an insurer, an auto finance giant and banks with diverse business models. [It includes credit card companies, too.]

"Applying the same scenarios to 19 firms makes little sense, Iyer agreed. A"one-size-fits-all approach" doesn't take account of the strengths and weaknesses of each bank's assets.
"I am very skeptical that we will learn much about the true conditions of these banks," he said."

Forcing the banks to boost their capital reserve may not be the answer to the problem:

"Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday that the tests will help banks develop plans to raise their capital buffers if necessary. The extra capital would ensure the banks could keep lending even if the recession worsened.

"Yet there's no guarantee that forcing banks to boost their capital reserves will have the desired result, Seidman said.

"Iyer said he worries the tests have become too tangled in fears of political or economic aftershocks to do much good.

""I'm a little concerned that somewhere in there, we've lost complete sight of the meaning of this exercise," he said."

Here's the list of 19 financial institutions, by the way.

• J.P. Morgan Chase & Co. (JPM)
• Citigroup (C)
• Bank of America Corp. (BAC)
• Wells Fargo & Co. (WFC)
• Goldman Sachs Group (GS)
• Morgan Stanley (MS)
• MetLife (MET)
• PNC Financial Services Group (PNC)
• US Bancorp (USB)
• Bank of NY Mellon Corp. (BK)
• SunTrust Banks Inc. (STI)
• State Street Corp. (STT)
• Capital One Financial Corp. (COF)
• BB&T Corp. (BBT)
• Regions Financial Corp. (RF)
• American Express Co. (AXP)
• Fifth Third Bancorp (FITB)
• Keycorp (KEY)
• GMAC LLC

My BIG question is: What happens if the bank disagrees with the government's findings and refuse to raise capital? Is the government going to take over the recalcitrant bank?

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