The Government's Gag Order
Big banks have reportedly passed the “stress tests.” But the Treasury doesn’t want them to talk about the results in their forthcoming earnings report. Will they keep their mouths shuts—and can regulators force them?
On Feb. 25, the Treasury laid out a plan to test the nation’s 19 largest banks. They were designed to determine whether the financial companies had enough capital to keep lending and weather losses in case of a severe recession. In essence, regulators wanted to determine if the banks would survive if all hell broke loose in the economy. President Obama met today with top officials, including Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, to discuss the results. The government says it will release the broad findings by the end of the month.
Word is already leaking out about the positive results, which has helped boost the stock market of late. Recent reports all indicate, at least vaguely, that the top banks got passing marks on the stress tests. But federal officials are apparently urging the banks to not divulge the details. That’s likely because some banks did better than others, and the U.S. doesn’t want to risk a run on the less-good banks—or some such adverse reaction.
It may be hard to keep a lid on the good news. Banks with less-than-desirable results aren’t likely to speak up in their quarterly results. But financial firms that passed with flying colors will probably scream it from the rooftops—or at least leak it quietly to the journalist of their choice.
Once details emerge about one bank, others will likely have to follow suit. Why? Let’s say a handful of banks share their high marks on the stress tests. Those banks that don’t reveal results may be viewed as hiding something—something bad. And investors, analysts, and consumers don’t take kindly these days when banks are seemingly guarded about their financial positions.
It’s not unlike what happened with TARP. When the rescue program was first announced, banks initially went to great lengths to show they were applying for the government funds—a sign that they were sturdy enough to do so. Those that didn’t apply for funds risked public perception that they were on the risk of collapse. Now, of course, it’s a badge of honor to show you’re rejecting the government money.
In the case of the stress tests, the government may want them to keep mum. But with investors desperately craving good news, banks aren’t likely to sit on it.