Pass/Fail

As multiple news sources are reporting today, the administration is planning to release some of the results of the "stress tests" (and not just because leaks of the findings are inevitable). David Sanger and Eric Dash write:

The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest.

The problem is this -- if the administration releases information suggesting that the tested banks are all basically fine, then the data is worthless. Markets will go on speculating on which banks are in the most trouble (and possibly be more pessimistic, generally, based on the government's bungling of the tests). If the administration provides meaningful information of any kind, on the other hand, markets will naturally assume that the weakest looking banks are the weakest banks, and will begin trading accordingly.

It's a little unnerving, then, that officials seem to be undecided how much information to release. This was always going to be the dynamic -- either the tests are fake and are therefore useless or they're real and will illustrate plainly which banks are in trouble. Solutions should be at the ready.

And the administration has said that no bank will "fail" the test; those with big holes that need filling will have them filled at government expense. Officials are acknowledging this today; in the Times story an unnamed administration officials says, "The purpose of this program is to prevent panics, not cause them...it's becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum." Fair enough. But I hope the decision makers realize that they've painted themselves into a corner. These tests, and the pressure placed on banks by Goldman's decision to return TARP funds, are going to push institutions into one of two corners -- fine and not fine. Treasury had better be ready to handle the "not fine" firms. They may be, but the internal debate over the test results leaves me with some serious doubts.