Stress Tested: Has Geithner's Bank Confidence Game Worked?

Original Link: http://news.yahoo.com/s/time/20090508/us_time/08599189682500

By MASSIMO CALABRESI

From his earliest days as Treasury Secretary, Tim Geithner's biggest challenge has been restoring confidence in America's fragile banks without taking the politically costly step of asking Congress for more money. To judge by the results of the government-run stress tests released Thursday afternoon, Geithner has somehow pulled it off - at least for now.

Not that three months of supervisory scrutiny of the country's top 19 banks hasn't produced some grim news. If the economy dropped to Depression-era levels of unemployment and credit shrinkage, according to the Treasury and the Federal Reserve, those firms could lose nearly $600 billion by the end of 2010, on top of the $350 billion they've already lost since mid-2007. Bank of America needs nearly $33.9 billion in new capital, Wells Fargo needs $13.7 billion and Citigroup needs $5.5 billion. Altogether, 10 of the top 19 need $74.6 billion in additional capital. (See who's who in Obama's office.)

But in a remarkable bit of salesmanship, Geithner has managed to package those findings as positive. Most of the banks can meet or beat the newly imposed government capital requirements on their own, either by selling off parts of their business, converting loans into stock or participating in the fledgling government-led effort to get toxic assets off their balance sheets. And those that are short on cash won't need more in total than the $110 billion to $135 billion the Treasury still has from the original $700 billion in TARP funds that Congress gave the Bush Administration for bank rescues last fall. "There is a reassurance in clarity," Geithner said at a briefing on Thursday.

Those revelations were greeted on Capitol Hill with stunned silence by Republicans and barely suppressed joy by Democrats. "I believe that many of [the banks] will be able to meet their capital needs, without further government capital," Federal Reserve Chairman Ben Bernanke told the Joint Economic Committee on Wednesday. Further, he said, Administration officials "don't think there's a near-term need" for more money from Congress. "That would be terrific!" chirped the committee's Democratic chair, Carolyn Maloney, of New York.

The news, leaking out over the course of several days, likewise lifted the markets, sending bank stocks up dramatically for the week by close of business Thursday. And for all the grim numbers, the banks themselves were touting the results, too. "The regulators demonstrated that the industry is strong now and, should conditions worsen, will only need minimal capital to remain strong," says Scott Talbott, a top lobbyist for the banks.

So three months after he rolled out his bank-rescue plan to disastrous reviews, Geithner, with help from Ben Bernanke and others, has bolstered the confidence of the banks, Congress, the stock market and much of the country. In an economy that runs on credit, that's half the battle. (See pictures of the dangers of printing money.)

But it's not all of it. Facts are important too, and some think Geithner and the government are fudging them. Nouriel Roubini, the hard-headed pessimist who foresaw the financial crisis, wrote Tuesday in the Wall Street Journal that the overall positive message of the stress tests "would be good news if it were credible," but it's not. He points to the recent IMF report that estimated $2.7 trillion in U.S. loan and security losses, and his own estimate of $3.6 trillion for the same potential losses. "The financial system is currently near insolvency," he concluded. Bernanke disputes the numbers, saying banks have "taken significant write-downs, they have reserves and there are substantial earning capacities." But Roubini is not alone in questioning whether the government used appropriately pessimistic assumptions in conducting the stress tests, especially as the financial sector faces a potential flood of commercial real estate losses that could mirror the residential market's recent woes.

Still, even if the numbers are based more on positive thinking than cold hard facts, it's tough not to be impressed by what Geithner and company have accomplished. In addition to the boost in public confidence, they've apparently figured out how to get the banks to support Geithner's other iffy program, the one designed to rid banks of toxic assets. Until now, banks have resisted selling the highly securitized, largely illiquid toxic assets, arguing they're worth more than the current fire-sale prices being offered on the open market. But taking them off the banks' books is key to restarting lending, and the stress tests' mandate to boost capital may be enough to get the process started.

The Treasury has given the troubled banks until June 8 to decide how to raise that capital, and until November to do so. Just by chance, early June is right around the time the Treasury expects big-time fund managers to have come up with the $500 million they need to leverage government subsidies to purchase the toxic assets on the cheap.

All of which goes to show that whatever his faults, Tim Geithner knows how to game America's confidence in the banking system. But does that mean the stress tests themselves are one big confidence game? Perhaps. The playwright David Mamet said such scams get their name not from the confidence the victim places in the con man, but the trust the con man pretends to place in the victim to elicit trust in return. By that standard, Geithner may be the most effective con man around, for better and for worse.