We are getting our first official information about the Bank Stress Test with the release of the White Paper detailing the assumptions behind how the stress tests were conducted. This is the initial step in a process culminating in the release of results for the individual banks.
In this case, the process may be more important than the result. We all know the results in advance. Secretary Geithner has already told us that most banks have already passed in previous speeches. I doubt that the government would announce with major fanfare that the American financial system is insolvent. There are two major issues regarding investor expectations that have to be addressed: credibility and panic.
The bank stress tests have to appear credible. If this is viewed as a test which has been designed so almost everyone passes, then, the uncertainty surrounding the solvency of our financial system will remain.
In order to maintain this credibility regarding the tests, some banks will have to fail. The question becomes what we do with these banks. If this is not handled appropriately, then, panic can result. A bank run does not add to investor confidence and can stop the current stock market rally dead in its tracks.
Therefore, the Obama administration is handling the release of the information very carefully. It is releasing it in stages in order to react to any market concerns that can derail the current rally. Thus, the real challenge is managing investor expectations.
It desperately wants to avoid a repeat of the press conference at which Secretary Geithner announced the Financial Stability plan. Everyone was expecting a detailed proposal explaining how to solve the financial crisis. Instead, a short outline was presented. The market registered its disappointment by going straight down. The administration had no backup plan in place. It desperately wants to avoid repeating this mistake.
However, eventually the real value of the assets on the banks' balance sheet will need to be addressed. At that time, we will find out how real the stress tests really were.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices.
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
