The Treasury's stress tests are now, officially, a joke…
First, the outcome looked as if all banks would need to raise capital. Then it was reduced to just three. Now it “might” be “about 10” of the 16 banks subjected to the Treasury's toothless stress tests that may need to raise additional capital to withstand further weakness in the economy.
And the report isn't even supposed to be out until Thursday. The Obama administration is doing its level best to make sure the market is perfectly prepared for the results of the stress tests.
While it's probably wise to consider the impact of the stress tests on the financial markets, I can't say I approve of rigging the tests to achieve a preferred outcome.
The New Bailout
Bloomberg reports that financial stocks made their biggest gains in a month yesterday on “optimism about the tests.”
That “optimism” is better described as the realization that the stress tests are fundamentally flawed and the government is prepared to handle the capital issue by letting the banks convert the preferred stock the government owns from TARP loans into common stock.