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Bank Stress Test: Don't Reveal the Results

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Uncle Sam doesn't recommend stocks. Why should government recommend banks?

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The Securities Act of 1933 laid the foundation for the stock market's future success.

The law required that investors receive financial and other relevant information about securities offered for sale. It also prohibited misrepresentation and other fraud in the sale of securities.

The government set up the framework to assure the free flow of information that would allow investors to make informed decisions, but didn't generate the data or pass judgment on it.

The Obama Administration could undercut the environment created by this masterful piece of legislation by releasing the results of "stress tests" of the nation's 19 largest banks.

Whatever the results, the administration's conclusions would be seen as a thumbs up or down on individual banks. A negative report could easily create a run on a weaker bank, undercutting the stated purpose of the governmental review and undermining confidence in the nation's banking system as a whole.

Think of it this way: Uncle Sam doesn't recommend stocks, so why should the government, in effect, recommend banks?

Who knows if the government's methodology for assessing the banks is sound? Worse, now or in the future the process could be poisoned by politics, punishing some banks for sound actions not "approved" by the government. The stress test could easily become the Housing and Redevelopment Act on steroids, distorting the system in dangerous ways that are not yet apparent.

But anything less than full disclosure is sure to raise shouts of outrage, and for good reason: The public's business ought to be conducted in public.

So far, the Trouble Asset Relief Program has treated strong and wobbly banks alike by pouring government money into both. This has provided needed cover for weaker banks that received TARP funds along with more robust banks.

Release of stress-test information could create a two-tiered banking system, or at least the perception of "yea" and "nay" banks in the public's mind. Stronger banks may soon repay TARP funds and be free of government oversight, while weaker banks continue to jangle the tin cup and receive government handouts.

Even with FDIC protection, it's not difficult to imagine that millions of hardworking people would move their funds to stronger banks and abandon those still receiving government aid. This would be catastrophic for banks struggling to get their books in order, and destroy whatever good TARP has done.

Uncle Sam hasn't said how much information will be released to the public and there's no indication what methodology was used to assess a bank's strength. There could easily be mischief in the methodology. But few would pay attention to how the assessment was made and most would look only at the conclusion.
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No positions in stocks mentioned.
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