Today's Outrage: Stress Test Stupidity


I don't know who's controlling the information these days, but the findings, or at least the alleged findings, of these government
stress tests has been handled about as sloppily as anything I can remember.

Every day it's a another bank in need of new capital or a new amount of it, whether it's Citigroup (Stock Quote: C), Bank of America (Stock Quote: BAC), Wells Fargo (Stock Quote: WFC) or someone else. Today we hear that BofA is being told by the government that it will need around $34 billion in excess funds in case the economy tanks even further.

That led to a near panic, as investors feared that BofA was going to require a whole new set of monies. It's already gotten some $45 billion from Washington, you know, and now this. No real surprise what happened next. Shares of BofA sank in the premarket.

Hold on though. Once people took a step back, they realized the reports weren't saying BofA needed to raise fresh capital. The New York Times, the first to report the $34 billion figure late Tuesday, said in the third paragraph that the company "could satisfy regulators' demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock."

In other words, BofA already has the money the examiners say it needs. It just needs a little accounting adjustment -- primarily to satisfy investors' recent obsession with tangible common equity, a conservative measure of how much capital a bank has to absorb loan losses. Citi and AIG (Stock Quote: AIG) made similar conversions earlier this year.

That key piece of information may have been lost in the myriad of reports from other news outlets following the Times. When the ADP employment report came in much better than expected, suggesting the economy is improving, and investors more fully digested the original report, BofA's stock took off and went from deep in the red to positive territory in a flash. Recently, it was up 17.4% to $12.73.

So let me try to be blunt. What on earth is going on? Why handle it this way? If you remember, we were supposed to find out the results this past Monday. Then it was delayed until Thursday. With each passing day, I'm having a harder time understanding what the point of that was. I don't know about you, but this certainly isn't the way I want business conducted.

If government officials or some other person or people with knowledge of the situation were going to slowly dole out the data, maybe they should have done us a favor and just announced that was the plan all along. Here's what they could have said:

"Each morning we will provide The Wall Street Journal or The New York Times with one to two new factoids or potential factoids. Please check the papers every morning on what could be the latest developments in our stress tests to ensure that your own stress levels remain elevated."

More than one market commentator has suggested the new crowd in our nation's capital is fond of floating a little information out there, gauging the public reaction and then making changes accordingly. Maybe so. Of course this has probably been going on since the press started covering politics. In that case, the current group is no different than any other.

The thing is, we are in the worst economic downturn in the modern era, and I want to think people who know what they're doing are in charge of the situation. I'm not sure the way the stress test has been handled is the best way to instill confidence. This isn't a game. It isn't about scoops or sending out feelers. It's about solving the most dire banking and financial crisis the vast majority us have ever witnessed and getting us out of this horrible recession.

Fortunately, we're supposedly one day away from the official results. Let's hope that puts an end to the guesswork so we can get down to business.

Related Stories:

Stress Tests: Some Banks Need More Funds
Banking 101: Bank Stress Tests and You
Banks Get Stress Tests, So Why Not You?

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