The Government's Gag Order

Posted by: Adrienne Carter on April 10

Big banks have reportedly passed the “stress tests.” But the Treasury doesn’t want them to talk about the results in their forthcoming earnings report. Will they keep their mouths shuts—and can regulators force them?

On Feb. 25, the Treasury laid out a plan to test the nation’s 19 largest banks. They were designed to determine whether the financial companies had enough capital to keep lending and weather losses in case of a severe recession. In essence, regulators wanted to determine if the banks would survive if all hell broke loose in the economy. President Obama met today with top officials, including Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, to discuss the results. The government says it will release the broad findings by the end of the month.

Word is already leaking out about the positive results, which has helped boost the stock market of late. Recent reports all indicate, at least vaguely, that the top banks got passing marks on the stress tests. But federal officials are apparently urging the banks to not divulge the details. That’s likely because some banks did better than others, and the U.S. doesn’t want to risk a run on the less-good banks—or some such adverse reaction.

It may be hard to keep a lid on the good news. Banks with less-than-desirable results aren’t likely to speak up in their quarterly results. But financial firms that passed with flying colors will probably scream it from the rooftops—or at least leak it quietly to the journalist of their choice.

Once details emerge about one bank, others will likely have to follow suit. Why? Let’s say a handful of banks share their high marks on the stress tests. Those banks that don’t reveal results may be viewed as hiding something—something bad. And investors, analysts, and consumers don’t take kindly these days when banks are seemingly guarded about their financial positions.

It’s not unlike what happened with TARP. When the rescue program was first announced, banks initially went to great lengths to show they were applying for the government funds—a sign that they were sturdy enough to do so. Those that didn’t apply for funds risked public perception that they were on the risk of collapse. Now, of course, it’s a badge of honor to show you’re rejecting the government money.

In the case of the stress tests, the government may want them to keep mum. But with investors desperately craving good news, banks aren’t likely to sit on it.

Reader Comments

Strategery

April 10, 2009 04:50 PM

Will banks keep quiet? If the TARP program and the special bailouts that AIG, Freddie, Fannie, etc. got are any guide; the banks will do whatever they please--regardless of government regulation or public outrage.

Jesse

April 10, 2009 04:55 PM

How exactly does a gag order help our economy? If I have deposits or a loan with Bank A, which did not pass the stress test, how bad will my financial situation be by the time I find out I should have switched to Bank B, which passed the stress test?

dw

April 10, 2009 04:59 PM

so they won't tell us how they did on their test. and now we have reduced what little credible information we had by watering down MTM. so just how much credibility do banks and other finance companies have any more? has it gotten to 0 yet? has it gotten below 0 yet?

Duh

April 10, 2009 05:19 PM

Ask yourself - If the news was good, would it have to be "gagged"?

These people are working for the banks, not us.

Chris

April 10, 2009 05:41 PM

The headline should read: "Geithner, Obama: Under No Circumstances Is The Emperor Naked".

Maybe they figured we wouldn't believe it even if they said the banks are OK.

M2M

April 10, 2009 06:12 PM

The banks were going to pass regardless.

Paula Hood

April 10, 2009 06:19 PM

The Fed decision to delay the announcement of the stress test results is a complete and total outrage….it’s just another gross example of the total manipulation of our markets. It’s yet another nauseating example of our government rewarding the very crooks and institutions who caused our economic crisis in the first place. I don’t remember “We the People” having any “say” in our newfound nationalism/socialism!!*XX**!!

While I'm at it, on another subject, I’d like to add that part of our new government “regulatory controls” should be extended to the NYSE and other exchanges with regard to real-time media coverage. Specifically, tighter controls need to be mandated against the CNBC cheerleaders who have turned the exchanges into a media feeding frenzy. The CNBC analyst wannabees actually pride themselves and brag about their ability to move the markets during program segments.

The media has no business on the floor of the NYSE or any other exchange for that matter. I would contend there must be some network sensoring software that’s available, similar to the “reaction meter” used by CNN during the 2008 Presidential election that could substantiate this claim with facts and data… some kind of real-time meter that could measure the impact of CNBC transcripts against the DJIA ticker.

Paula Hood
Seattle

Heywood Jablowme

April 10, 2009 06:24 PM

I guess the Administration hasn't looked up the definition of transparency. I can help them out - it does not involve gagging the banks to keep the people from finding out how bad things are.

CynicalMan

April 10, 2009 06:36 PM

More presumptuous manipulation of the economy by pretenious economists who failed to recongnize the problem and take action to avert collapse. Politicians and their minions playing GOD with the economy.

John Galt

April 10, 2009 07:58 PM

The banks don't have the guns, the politicians do. The banks are under armed control right now. Just ask Wells Fargo and Goldman Sachs about leaving that TARP 'program' (and "program" here means: mafia style arrangement).

STEVE ROSS

April 10, 2009 08:38 PM

Sometimes it is best for all of the facts to be studied before letting only a portion of unsubstantiated rumors and people start being irrational again. I trust Obama and he has injected a lot of himself in to this to fix the
Bush problems. Obama will guide us through once again in the right direction.

ponzied

April 10, 2009 08:53 PM

duh.....what else would fascists do?

Ken

April 10, 2009 09:03 PM

Yeah, the government knows perception is reality and will play that to their advantage. Businessweek got it wrong by assuming the good banks wanted to spread the word. It was the government trying to hide the bad bank news. Typical.

STEVE ROSS

April 10, 2009 09:18 PM

I was not sure if my last comments were posted. I just think if Obama and Geithner want this to happen, then it will and will probably work out for the best.

not yours

April 10, 2009 09:30 PM

duh....! what else would u expect from fascist bankers???

fj

April 10, 2009 09:57 PM

My best guesstimate is that the sooner we have transparency, as ugly as it may be, the sooner the problem banks can be addressed (taken over/broken up)and we can move on.

"Failure to communicate" = scared to communicate.

Ali

April 11, 2009 03:24 AM

If the banks stocks are going up next week the test was passed, only the insiders know so we pay the price.

Matt Lechner

April 11, 2009 04:51 PM

While we believe there has been far too little disclosure regarding TARP and generally regarding the financial "rescues" of the last year; regarding the so-called 'stress tests' we would note that the notion that a particular test can indicate an overall pass/fall choice for a bank - that can be false. Stress tests can be designed and interpreted in all sorts of ways, and while the public has a clear right to know what is going on with institutions which have received any kind of rescue money and what is going on with public depositary institutions in general, care must be taken not to present numbers and/or statistics which are likely to be not well understood by the public. For example, a bank could "fail" a particular type of stress test, but have no meaningful risk relating to the type of risk being tested. We believe that there should be dialog on how best to present the stress test information, however - the banking industry has recently been acting rather poorly in regard to the whole area of disclosure - and we would take this opportunity to again express grave concern at the recent ruling of FASB, whereby at the instigation of the banking industry, investment holdings are not being properly marked to market. The FASB matter reflects very poorly on the banks, and underscores the need for a rather bright light to be shone on the stress test results, but with good explanation so that the numbers and statistics associated with the stress tests do not get misinterpreted or sensationalized, or minimized if in fact they show true undue risk at a particular institution. Also, at the risk of repeating, we again state the need for banks and financial institutions in general, and particularly ones having non-U.S. operations, especially any operations in banking secrecy jurisdictions - to comply with the Patriot Act. In general, the Patriot Act makes it unlawful for a U.S. bank or financial institution to offer accounts based in a bank secrecy jurisdiction, and we call on those banks and financial institutions to pay heed to that point because the Patriot Act was enacted for non-trivial reasons - and at the end of the day it is now rather seriously unlawful for any U.S. financial institution to offer accounts within a bank secrecy jurisdiction. Persons interested in looking into the general risk management profile of their financial institution should inquire if, in accordance with the SEC rule, the institution has appointed a "Chief Compliance Officer" and if that person is presenting a written quarterly report to the board; no matter if the institution has appointed an in-house attorney to the CCO post, those materials are not protected by attorney-client privilege, although the board may or may not be required to disclose the actual reports.

Matt Lechner - CFP, CRPS, FRM
Chairman - WSSIG, the Wall Street Special Interest Group

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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