The Obama administration is drawing up plans to disclose the conditions of the 19 biggest banks in the country, according to senior administration officials, as it tries to restore confidence in the financial system without unnerving investors.
The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest.
While all of the banks are expected to pass the tests, some are expected to be graded more highly than others. Officials have deliberately left murky just how much they intend to reveal — or to encourage the banks to reveal — about how well they would weather difficult economic conditions over the next two years.
As a result, indicating which banks are most vulnerable still runs some risk of doing what officials hope to avoid.
The decision on handling the stress tests underscores the delicate balancing act by the government, which has spent hundreds of billions to stabilize banks. Despite some signs of improvement in the financial system, many economists remain concerned that banks are still weighed down with toxic assets stemming from the housing downturn.
Until now, the Treasury Department has simply said that it will reveal the amounts of any new infusions of capital into banks that regulators judge to be at risk if the economic downturn is prolonged or the economy takes a further dive.
The administration’s hand may have been forced in part by the investment firm Goldman Sachs, which successfully sold $5 billion in new stock on Tuesday and declared that it would use the proceeds and other private capital to repay the $10 billion it accepted from the government in October.
That money came from the Troubled Asset Relief Program, or TARP, and Goldman’s action was seen as a way of predisclosing to the markets the company’s confidence that it would pass its stress test with flying colors.
Goldman’s action has put pressure on other financial institutions to do the same or risk being judged in far worse shape by investors. The administration feared that details on healthier banks would inevitably leak out, leaving weaker banks exposed to speculation and damaging market rumors, possibly making any further bailouts more costly.
The Goldman move also puts pressure on the administration to decide what conditions will apply to institutions that return their bailout funds. It is unclear if Goldman, for example, will continue to be allowed to benefit from an indirect subsidy effectively worth billions of dollars from a federal government guarantee on its debt, a program the Federal Deposit Insurance Corporation adopted last fall when the credit markets froze and it was virtually impossible for companies to raise cash.
In ordinary times, regulators do not reveal the results of bank exams or disclose the names of troubled banks for fear of instigating bank runs or market stampedes out of a stock. But as top officials at the Treasury and the Federal Reserve Bank focused on the intensity with which the markets would look for signals about the nation’s biggest banks at the conclusion of the stress tests, the administration reconsidered its earlier decision to say little.
“The purpose of this program is to prevent panics, not cause them,” said one senior official involved in the stress tests who declined to speak on the record because the extent of the disclosures were still being debated. “And it’s becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum.”
Two senior government officials said on Tuesday that they were now likely to encourage the banks to reveal a range of information, perhaps including the size of losses the banks could suffer under each of the stress assumptions. Critics of the testing system, however, have questioned whether the hypothetical cases are extreme enough.
“The assessments are not yet complete,” Stephanie Cutter, a spokeswoman for the Treasury, said. “When they are, we’ll work with the banks on how best to release the appropriate data and on what time frame to ensure fairness and minimize market uncertainty.”
Concern about the impact of the stress tests on the financial markets has been deep. Last week, the Federal Reserve, acting on behalf of itself and other regulators, sent e-mail messages to banks undergoing the stress tests, urging them to say nothing about the tests during the earnings season, including their capital needs or plans to return TARP money.
The banks, officials say, have not been told of any test results, but since they know what information they have had to provide, they can probably estimate their own results.
Despite the regulators’ warning, there is evidence that some banks are trying to signal to the markets early that their quarterly results will look good — and, by implication, that investors should not worry about the tests.
Citigroup and Bank of America made positive statements about the current quarter weeks ago, and last week, John Stumpf, the chief executive of Wells Fargo, said the bank was in good shape and expected a $3 billion profit this quarter. The Wells Fargo statement appeared to frustrate some Treasury officials, and regulators clearly fear it will be more difficult for them to issue negative assessments of banks that have already proclaimed that they are in good shape.
A Wells Fargo spokeswoman, Janis Smith, said the company would not comment on interactions with its regulator.
“Given current market conditions we felt it was important to share preliminary results as early as possible,” she said, “and we are not aware of any constituent who would have disagreed.”
After Goldman’s announcement on Monday that it planned to return the TARP funds, other big banks are looking for ways to do the same. Healthier banks are desperate to get out from the government’s thumb, believing the heightened scrutiny and the restrictions on executive compensation could cripple their businesses. But senior administration officials made clear they, not the banks, would decide whether to let the institutions return the money, and that would depend on their ability to raise fresh capital in the private markets.
“We are going to have some separation between the haves and have nots,” said Dino Kos, a banking analyst at Portales Partners, a research firm. “The downside of it is that you are bleeding capital out of the banking system at a time when the banks would be better off with more, rather than less.”
The Treasury Department says it has $134.5 billion in TARP funds. That includes a conservative estimate that the banks would pay back $25 billion, a sign the government will allow at least some big banks to return the money.