The news, reported by Eric Dash in the NYT, that the stress tests of 19 big banks are almost all done and none of the 19 will be due for an immediate FDIC takeover as a result has been greeted in the financial blogosphere with all manner of hooting and moaning and groaning.
I get the mockery, but I also sort of don’t, given that it was pretty clear from the beginning that this would be the result of the stress test. It was supposed to identify which banks needed more capital to weather expected losses down the road, after which Treasury would find ways to recapitalize them if private investors won’t. Presumably those recapitalizations will be more punitive and akin to nationalization than what we’ve seen before, but a standard-issue FDIC takeover where small depositors are protected and everyone else fights for what’s left is simply not in the cards for the big banks. Why not? Well, for one thing, the U.S. joined in a G7 pledge in October not to allow any more systemically important financial institutions to fail. For another, the Swedes protected everybody but management and shareholders at the banks they took over, and we all know the Swedes know how to do bank bailouts.
So, as has been the case for the past couple of months with Tim Geithner and his bank plans, the proof will be in what comes next. And I do entirely agree with the criticism that Geithner and Treasury have been awfully unclear about what in fact will come next. Kevin Drum puts it nicely:
So what’s going on here? Why are Treasury officials privately telling reporters that everyone is going to pass but that some banks will receive a pass-minus and may be required to do things that are almost certainly impossible? Are they just trying to lay the groundwork for failure and temporary nationalization later on? Or what?
I’m having a harder and harder time figuring out what’s going on as time goes by. If everything is on the up and up, it doesn’t make sense. If there are hidden wheels, though, I’m not sure they make sense either. Just what is Treasury up to?