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Treasury’s ‘Stress Tests’: Hurry Up and Wait

Charles Dharapak/AP PhotoMore than four months after former Treasury Secretary Hank Paulson announced “decisive actions to protect the U.S. economy,” everybody is waiting to see what the U.S. Treasury is going to do next. Nationalize or not? Bank stocks, those of Citigroup and Bank of America in particular, shot downward last week, and investors remain wary.

The answer, so far, is that the U.S. government really would prefer not to seize control (however temporarily) of any of the major banks. That’s what White House Press Secretary Robert Gibbs said last week, and in a joint statement this morning from the Treasury and bank regulators, they proclaim that the “strong presumption” going forward is that “banks should remain in private hands.” Whether that vague assurance is enough to convince the markets is one thing, but it’s certainly not a decisive statement. And it indicates that ahead of us awaits more wondering and waiting, as regulators begin “stress tests” of the major U.S. banks to assess their health.

The tests will begin this Wednesday, according to the statement, but considering that they are at the center of the Treasury’s plan to rescue the financial system, we know curiously little about them.

Here’s what we do know: The tests are expected to take several weeks, reports the New York Times. The goal is to evaluate a bank’s health under increasingly dire financial scenarios (soaring unemployment, increased foreclosures, etc.). The results will not be made public.

That’s about it. Treasury officials have said that the tests will be used to assess how many more billions the banks need to weather the storm. What they haven’t said is whether there’s a threshold beyond which a bank might be deemed beyond saving.

Meanwhile, the banks themselves seem as restless as investors for decisive action. This weekend, Citigroup reportedly proposed to federal officials a scheme to convert a portion of the government’s $45 billion preferred stock in the company into common stock, a move that would accomplish two goals for Citi: relieve the bank of the burden of continued dividend payments to the Treasury and bolster its chances on the government’s stress tests by juicing its “tangible common equity” ratio, a measurement of bank health that regulators reportedly plan to focus on in the tests.

Judging by this morning’s statement, the government isn’t buying the proposal. Earlier investments will be convertible to common shares, it seems, but only after regulators run their stress tests and the Treasury determines what to do next. So Citigroup, like everybody else, will just have to wait.

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