May 7 (Bloomberg) -- President Barack Obama’s administration is keeping open the option of forcing management changes at banks getting substantial government aid following the release of “stress test” results.

White House press secretary Robert Gibbs said yesterday that federal officials will want to make sure that financial institutions determined to have insufficient capital have a sustainable plan to go forward.

“The government has, in each of the current and past administrations, weighed in on changes at the CEO level and at the board of directors level” at auto companies and financial institutions needing federal aid, Gibbs said at a White House briefing. In those cases the government wanted to make sure “that the management was in place to remedy the situation and ensure long-term viability without continued government assistance.”

The message was reinforced by Treasury Secretary Timothy Geithner. “We’ll have to make judgments about whether the quality of leadership of those boards is strong enough so that again our interests are met best,” Geithner said in an interview with Charlie Rose broadcast last night on PBS.

The stress tests of the 19 largest U.S. banks by the Federal Reserve and regulators are scheduled to be released today. Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and GMAC LLC are among the companies judged to need additional capital, people familiar with the matter said.

Replacement Precedents

The administration asked General Motors Corp. Chief Executive Officer Rick Wagoner to step down in March and said it wanted a majority of board members replaced after determining GM’s recovery plan, under terms of $15.4 billion in government loans, was insufficient.

Under the administration of former President George W. Bush, the chief executives of American International Group Inc. and Fannie Mae and Freddie Mac were ousted after the government took control.

Obama said last month that he would demand “accountability” from any U.S. banks that require additional taxpayer money after the stress tests were completed.

“We’ll try to use as light a touch as we can, but I’m not going to simply put taxpayer money into a black hole,” he said.

Gilbert Schwartz, former associate general counsel of the Federal Reserve Board and now a partner at law firm Schwartz & Ballen LLP in Washington, questioned how far the government would go in forcing management changes based on stress tests, because the assessments are based on a “what-if situation.”

‘Huffing and Puffing’

“It’s a lot of huffing and puffing,” he said. Still, he added, “Given what’s happened to some other senior executives, boards always have to take the comments of government officials seriously.”

While dumping the CEOs may discourage risky behavior and send a signal that “the rats who created the mess are gone,” it may leave the banks without experienced hands at a time when they’re needed most, said Sherrill Shaffer, who served as the New York Fed’s chief economist during the savings and loan crisis of the 1980s.

“If you take out the people who are in place, who know the institution, who have fantastic levels of understandings of what’s going on in the markets and the various departments and the organization and so forth, then that level of expertise is going to be impossible to replace in the short run,” said Shaffer, now a banking professor at the University of Wyoming in Laramie. “The short run can be several years.”

Fresh Leadership

Economists, investors and regulators disagree on whether banks can heal themselves without fresh leadership. Managers of failing banks usually are fired when they’re seized by the FDIC. It’s a trickier decision for managers of banks surviving on public assistance, said Bert Ely, who heads the banking consultancy Ely & Co. in Alexandria, Virginia.

“As the government increases its direct ownership stake in these banks, it gets harder and harder to make the case that the government shouldn’t have some say,” Ely said.

The “judgment call” on whether to fire the CEOs of bailed-out banks should be made by the regulators, not the White House, said William Isaac, a former Federal Deposit Insurance Corp. who now is head of Secura Group, a consulting firm in Vienna, Virginia.

Gibbs said after the tests are released “there will be a period of time to put together a plan” to meet capital requirements identified by the assessments.

“We’ll have to wait and see what these individual tests bring,” he said.

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Hans Nichols in Washington at Hnichols2@bloomberg.net

Last Updated: May 7, 2009 00:01 EDT