The Government's Hand Forced

Geithner and company, having apparently gathered a sufficient amount of data to determine which of the nation's nineteen largest Banks are adequately capitalized, will reportedly convene this week in order to devise a plan of action. The new accounting rules, conveniently implemented just prior to this "meeting of the minds", will be taken into consideration during this decision making process. Given the crucial nature of these tests, along with the Catch-22 that the Government has created for itself, we expect Treasury to take some form of decisive action in the next two weeks.

For starters, we are told that Treasury has all intentions of keeping the results of the stress tests shrouded in secrecy, and away from the judgmental eyes of the Market. Realistically however, the sieve-like tendencies that pervade every level of Government will impair Mr. Geithner's ability to maintain 100% secrecy. The game then, is for Treasury to act upon the results before any Government Insider decides to feed his sense of self-importance by whispering into the ear of a journalist.

Given that the above assumption is correct, we would additionally propose that it is nearly impossible that all nineteen banks managed to "pass" the tests. Furthermore, it is highly probable that at least a few Institutions will be viewed by the stress tests as beyond the point of repair. This being the case, Treasury will be forced to move in and either nationalize or dismantle the most crippled bank(s). Now, due to the anti-nationalization rhetoric that has emanated from Washington, this new rescue effort will likely embody the full spirit of nationalization, while assigning some sort of euphemistic moniker to the action.

In any event, the conclusion of the stress tests has effectively forced the Government's hand. Every day that passes without action will only serve to fuel speculation as to the identity of the "weak links in the chain". This is our humble view.

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