The Treasury Department has taken a shine to administering "stress tests" on financial institutions. The exams will reveal the true state of their health — or lack of it. Thus saith The New York Times.
You don't have to read between the lines to sense the skepticism:
Bank executives reached over the weekend said that the tests might not produce information that is very different from what regulators already know about the banks. The Federal Reserve already has hundreds of examiners on site at the largest banks, monitoring their businesses.
The article also points to "critics" who say that, despite billions in write-downs, "the major institutions still carry trillions of dollars in additional toxic assets and are too damaged to resume normal lending."
Blawgletter doubts that the results of stress tests will convince anyone. The incentive to fudge — and thus to save billions inbailout loot — looks too powerful. Unless of course the outcome reveals what Paul Krugman calls the banks' "zombiehood".
[The process reminds us of our system of deciding whether a federal judge should decline to handle a case on the ground that reasonable people might question his or her impartiality. The judge himself/herself rules on the issue, subject to rare and deferential review. But maybe that will change after the Supreme Court issues its opinion in Caperton v. Massey, which it hears next Tuesday. Article here.]
We'd much rather see an item-by-item accounting of the banks' assets and liabilities than a report that gives the banks a low but passing grade. Even without the names of the counterparties, the list would add some clarity to a blurry picture.
At least then we'd know some actual facts.
