"Bank Stress Tests" may be too Stressful for the Market

When they were first proposed, the "Bank Stress Tests" that were part of Treasury Secretary Tim Geithner's economic plan seemed prudent. If the government has a clearer picture of the actual state of troubled banks, then it could react more intelligently. What could be more logical? But now, it appears such revelations could do more harm than good as a jittery market rushes to judgement over the slightest whiff of weakness in a bank's balance sheet.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said...

The economy has worsened since the Treasury announced the tests in February, raising questions about whether the scenarios regulators are applying to bank portfolios are rigorous enough. Officials are considering taking a tougher stance in judging the tests’ results given the job market’s deterioration, the Financial Times reported today without citing anyone.

Under the assessments’ “more adverse” scenario, the unemployment rate is seen rising to 10.3 percent in 2010. When officials designed that scenario, the most-recent jobless rate was 7.6 percent. It has already soared to 8.5 percent since then.

Of course, since the economy - or at least Wall Street - is essentially mass psychology, we have a lose-lose situation here. If the report is released and it contains bad news, then there will be a panic. But if the report is NOT released, it will create additional uncertainty which will drive the market down steadily. Knowledge is power, but knowledge untempered by wisdom is a bull in a china shop.