Thursday, April 9, 2009

Stress Tests: Who Will Take the Fall?

Early accounts of the results of the stress tests, apparently reaching the level of "fit to print" as determined by one news outlet in particular, are decidedly upbeat in nature. We are told that, in general, the nation's banks seem to be holding up quite well under the pressure of these tests. These rosy assertions are of course disclaimed by the caveat that the Banks "May Still Need Aid". Obviously, each Bank will possess a slightly different set of circumstances that correspond to a particular amount of additional capital needed by that Institution(at this one point in time). However, an analysis of the rhetoric that has emanated from Geithner and company would suggest that the Government's objective is to create at least one "fall guy" from the stress test process.

It has grown increasingly apparent that the motivation behind Treasury's stress tests is not to conduct a wholehearted investigation of the financial sector's future viability, but rather to instill confidence in the system in general. Granted, a small army of Bespectacled Bank Examiners are in fact sifting through the sewerage on Bank's balance sheets, proving that Geithner understands the need to provide this little exercise with the illusion of legitimacy.

Assuming that Mr. Geithner fully comprehends the need for a show of legitimacy(and we think he does), he in turn understands that some Bank(s) must take the fall for the good of the others. While we can assert with confidence that Goldman Sachs will NOT be one to take the fall, we are not able to say with certainty who exactly will. Likely, whichever Bank is least adept at behind the scenes chicanery will be punished accordingly. In any event, we expect these distinctions to materialize in short order. Sunday night has become an exceedingly popular time slot for this sort of announcement, however, we would be hesitant to put our money on any Government action these days.
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