Fratto: Stressing The Stress Tests

I can't stress this enough: the idea of publicly releasing big bank stress test results— in any form — is, well... distressing.

We sometimes see the worst of Washington when leaders try to cloak an economic solution in political garb, and that's what's playing out today, with the ironic result of increasing stress in the financial sector and undermining the policy goal.

The political clothing was apparently needed because of congressional spoon-banging over what was being done with original TARP funds. Nevermind that the answer to that question was obvious when the wildfire threatening to burn down our financial system last year was extinguished using only the first have of the $700 billion rescue fund.

The Obama Administration, again demonstrating an unnerving and self-defeating tendency to hop on the latest populist bandwagon, responded with a promise to publicly release the results of stress models applied to the biggest banks receiving TARP funds, and to then make capital infusion decisions based on the results. While the positive headlines must have been satisfying at announcement time, knickers are now being twisted in Washington and Wall Street over whether and how to fulfill the promise.

Let's set aside for now the urgency of the tests themselves. (News Flash: if your stock is trading in single-digits, you probably failed your stress test.) It would be fair to argue that stress tests should have been done years ago. But to argue that there is a need to publicly reveal bank vulnerabilities today is a non-sequitur.

Maria Bartiromo, in her CNBC exclusive interview with Larry Summers yesterday, asked the Obama Administration's chief economic policy maker whether there was any concern about investor flight if the government identifies the banks most unlikely to handle a severe economic downturn. That's the right question. The answer was a sanguine assertion about transparency contributing to confidence.

Well, only sometimes. There are virtues to transparency, but in some cases transparency actually undermines confidence. And this is one of those cases.

It's the same reason the FDIC doesn't release the names of banks on its watch list. Releasing that information would likely induce the event desired to be avoided.

Releasing sector-wide results, while less damaging, misses the point of the political problem: Congress will still want to know about individual banks. They should be told that it would only be appropriate to reveal that information on a confidential basis — as is done with countless other federal programs involving sensitive information.

Here's also something to stress about the transparency red herring: I'm aware of no federal program in history — including nuclear and intelligence programs — with more oversight and reporting requirements than the TARP program. The TARP is subject to the oversight of two congressional committees, a special congressional oversight board, a special inspector general, the Treasury inspector general, IGs of the participating agencies, the Government Accountability Office, and requirements for regular and public reporting to Congress, the SEC, the Fed, and other agencies.

The TARP program is as transparent as it needs to be, and the banking system has dealt with as much stress as it can handle. For now, let's keep the stress tests private and focus on economic solutions, not political solutions.

• Read what our other contributors are are saying on CNBC.com
• Andrew Busch: The Stress Test, Goldman Sachs & Ireland

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Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.