Tomorrow Tim Geithner, Treasury Secretary, is set to announce the results of the government’s bank stress tests on the country’s top 19 banks. Some of the “results” are leaking out today with speculation running rampant in business news channels on which companies will be required to raise capital and which won’t.

Banking Stress Tests Revisited

Let’s go back a few weeks to when Mr. Geithner announced these banking stress tests. The country was sick of hearing about the nearly $800 banking bailout bill and other “stimulus” spending the taxpayer was on the hook for. The country and especially investors on Wall Street, needed reassurance these banking institutions were not just so called “zombie” institutions requiring a never ending stream of taxpayer support.

Along comes Mr. Geithner’s stress test idea.

According to the Treasury Secretary we would all soon know the real health of these companies that got the bulk of the TARP funds. This did NOT ease my fears about the mortgage backed securities and derivative losses that are still on the books of these banks, but it sure helped Wall Street pump money into the banks.

The Washington Post in recent article wrote:

“Bank of America’s share price has climbed by 129 percent since the tests were launched. Wells Fargo is up 78 percent, even though both companies are likely to be ordered by the government to raise additional capital. Even Citigroup, the most troubled of the large banks, has risen 27 percent.”

Those bank stocks increasing at that pace are ridiculously high, but it does show confidence…maybe false confidence. The whole point of publicly announced bank stress tests was to instill investor confidence in the banking sector and quell the taxpayer fears we were pouring money down a hole.

And so regardless of the results released tomorrow, the “stress tests” did their “job”. And their job was not to really discover the strength of the banks tested, it was to instill confidence. My guess is no matter what the results are we should all consider them a “whitewash”.

I define whitewash as “a specious or deceptive clearing that attempts to gloss over failings and defects.”

That is a perfect description of the government’s banking stress tests. Here’s why…

1. The tests won’t know the true loan losses including the mortgage derivatives and they won’t until they happen. We are not out of the woods on the declining residential real estate market just yet.

2. The tests won’t discover the effects of the international financial crisis and recession which is just now being felt.

3. The test won’t provide measures for the new commercial real estate bursting bubble which will hit the banks like a sledge hammer toward the end of this year.

I could go on and on…but I won’t.

Government Ownership of Banks

The worst thing about the bank stress tests is it may be a ‘back door’ method for the government to actually own the banks.

Yikes!

We see them actually owning companies like Fannie Mae and some auto companies. As much as I hate “too big to fail” banks, I don’t want the government to run them.

Here’s how this could happen…

The stress test identifies banks that need to raise capital and the government mandates they do just that. One way to raise capital is to convert “preferred shares” to common shares. Common shares gives the holder voting rights and if you own, say 51% of the common shares, you effectively own the company.

This scenario, however unlikely, is a not a good idea. Government run banks is as bad an idea as a government run automaker. I know it’s easy to hate bankers now. They ruined everything with their fancy mortgage-backed securities and they unrepentant Ivan Gecko “greed is good” attitudes.

So let’s regulate the hell of them so they can’t do it again. Let’s let them fail, file bankruptcy, so they can learn a lesson or two. Let’s find out who violated banking laws and prosecute them. Let’s do all of that and more, but let’s not let the Obama administration and Timothy Geithner own the banks.

Good Luck!

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