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Bank tests cause stress

Government tests on the financial health of the nation’s major banks are causing significant stress on Wall Street and in Washington, where bankers and officials fear that the release of highly anticipated information may do more harm than good.

The Obama administration is finding itself in a potentially no-win situation as it prepares to release details Friday about the methodology used in the tests, and at least partial results May 4. The so-called stress tests will determine whether the banks need more government bailout money and the $700-billion rescue fund needs to be replenished.

Regulators and administration officials are still wrestling with how much of the test results to disclose.

Releasing too much information could undermine the banks’ health -- the very thing that the administration is trying to avoid, experts said. Revealing too little after weeks of buildup would cast doubt on the process and create a vacuum in which investors and depositors would make their own assumptions, possibly leading to runs on the weakest banks.

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“They’ve gotten themselves in a pickle on this thing,” said Bert Ely, an independent banking analyst. “It’s clear they didn’t think through how this was going to play out.”

The goal of the tests is to figure out whether Bank of America Corp., Citigroup Inc. and 17 other banks with more than $100 billion in assets each need more money over the next two years to ride out a possible worsening of the recession. They have received a total of about $214 billion in bailout money.

No banks will fail the test, administration officials have said, but the results will determine whether they have to raise more capital. If they can’t do that in six months, the government will step in with funds to shore up operations at the banks, which are deemed too big to fail.

White House Press Secretary Robert Gibbs downplayed concerns that the tests may be counterproductive.

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“I think rather than these being seen as a destabilizing activity, that instead they will be seen as a stabilizing activity, that our hope is that banks that are not healthy or need help will first and foremost seek that help privately, and then we’ll take steps from there to assist them,” he said. “But I think this is part of a longer process, towards bringing some stability to the financial system.”

Top Obama administration economic officials have been using the tests to ward off broader questions about plans for stabilizing the banking sector, portraying them as the crucial step to take before addressing whether more money is needed.

The tests are expected to be finished by the end of the month, with release of some information on May 4 from regulators and possibly by the banks themselves, according to a federal regulatory official, who requested anonymity because he was not authorized to speak publicly about the tests. Exactly what kind of information will be released is “under active discussions,” the official said.

Regulatory reviews of banks normally are kept secret to avoid shaking the confidence of investors and to keep customers from racing to withdraw their money. In this case, however, no news would not be good news. If the administration says little about the test results, Wall Street and the public are likely to assume the results were not good, analysts said. If the administration releases detailed information, however, it would identify which of the large banks are weaker, potentially destabilizing them.

“If they draw differentiations, what you’re effectively doing is tying a target on the back of the weak ones,” analyst Ely said.

To avoid misinterpretations, the administration plans to release details about the testing process Friday to give the public and investors a grounding for whatever data are released May 4, the regulatory official said.

Wayne Abernathy, executive director for financial institutions policy and regulatory affairs at the American Bankers Assn., said the Obama administration must be cautious about what it releases from the tests.

“If you’re not careful about what you put out, you would erode confidence in the bank,” he said.

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But failing to release enough information could undermine confidence in the bailouts, said Barbara Roper, director of investor protection at the Consumer Federation of America.

“The public is being asked to fund this bailout. They have a right to full disclosure about the nature of their investments,” she said.

A lack of details also may cause a backlash in Congress, which would decide whether to expand the $700-billion financial rescue fund. Lawmakers from both parties have complained that there weren’t enough strings attached to the bailout money. And Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said last week that the test results should be made public.

When the stress test plan emerged in February as a kind of souped-up version of regular regulatory bank examinations, senior administration officials said the government did not plan to release the results.

They said, however, the public was likely to learn indirectly which banks did well as the institutions either tried to raise funds or reported that they needed no additional capital. Any new infusions of bailout money -- the banks can request government funds immediately -- also would be disclosed.

The topic of the stress tests came up during a meeting at the White House late last month between President Obama and 15 top executives from the nation’s largest banks, all recipients of bailout money, according to bank executives who were knowledgeable about the meeting but not authorized to discuss it publicly.

The bankers told Obama that the initial information released about the test had been too limited, and that they urged the president to “put an end to the issue” by announcing the results in a “clear, transparent and definitive way,” according to one of those people.

The Federal Reserve has told the banks not to reveal the results of the tests, just as they are barred from disclosing the results of regulatory exams, said another bank executive.

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The ban on disclosing regulatory findings is designed to prevent deposit runs at institutions that appear weak, something that analysts warn the government is risking in conducting the stress tests.

The Securities and Exchange Commission requires public companies to publicly report any “material corporate event.” Banks and regulators are trying to figure out whether the stress tests are simply bank exams or something more, said Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents large financial institutions.

“It’s going to be a challenge,” he said of the administration’s decision about how much information to release. “My advice would be to take a look at the total results and weigh the balance between transparency and protecting the system.”

In a report on the tests last week titled “Total Confusion,” analyst Richard X. Bove of Rochdale Securities contended that the government had backed itself into a corner because there was “no effective way to communicate the results of this test without causing greater stress than the test itself.”

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jim.puzzanghera@latimes.com

scott.reckard@latimes.com


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