Market Talk

May we suggest, with all due respect, that the so-called stress tests of the nations banks, administered by the federal government, are, to put it bluntly, a complete boondoggle. Unless the goal was to utterly confuse the public, wrack investors’ nerves, further Uncle Sam’s reputation for being unable to competently unscrew a bottle cap and buy the banks two months to further avoid solving their own problems.

In that case, the whole exercise was a smashing success.

“The financial crisis has gone enough rounds to have evolved from tragedy into farce,” Yves Smith writes at naked capitalism. “The stress tests are a prime example.”

The problem for the regulators - and the banks understand this already - is that no matter how they try to soft pedal the results, no matter what language they use to couch them, the public will perceive, and perceive correctly, that some banks have failed the test. Because in any real test, failure is a possible outcome.

That’s making people nervous.

Financials fell yesterday after Reuters reported the release date would not be May 6, not the originally reported date of May 4. Bloomberg reported this morning that the results may be delayed until the end of next week. These are only incremental advances on the story. The WSJ reported earlier this week  that the results would come not on May 4 but some time during the week. But the reaction to the reports illustrates just how confused the public is about the tests.

The delay is being driven by the banks’ disputing, and probably rather vociferously, the results. Early reports said one bank failed (sorry, sorry, we forgot, nobody failed.) Early reports said one bank didn’t do as well as some of the others. Then reports said three. Then six. At this point, it isn’t clear how many banks didn’t do as well as some of the others, but what is clear is that the banks that didn’t do so well are complaining about it, and make enough of a stink to force the government to delay publishing the results.

Which is, when you think about it, loony.

“Let’s face it, in a real test, you don’t get to score it yourself and then argue the grade,” Smith says. ”This is yet another Geithner miscalculation…He wants to look tough on the banks, yet starts waffling when the banks get in a tizzy and presumably invoke images of market mayhem.”

The tests have been clumsily handled since they were first announced, and have instilled more confusion than the confidence they presumably were supposed to instill. And perhaps the feds have come to realize, too late, that the stress tests are, in the end, a test, and in a test, failure is an option. As former Dallas Fed president Bob McTeer put it:

Any implicit ranking of the “Big 19″ will cause problems for the equal banks that are not quite as equal as others. My guess is that the regulators are frantically meeting trying to get themselves out of the foolish promise with the least amount of damage. Maybe this will put a damper on the notion that transparency is the answer to everything - that more information is always better than less.