Geithner's Bank Stress Test Equals Attempt to Buy time to Because of Indecision

Over the last two days, markets have been trying to grapple with news that the the Treasury Department under Tim Geithner is going to put the 20 largest banks through a stress test. I am not sure what Geithner is going to be stressing, but based on the statements from Ben Bernanke and Sheila Bair today, it is clear that the Obama Administration does not want to nationalize Citibank or Bank of America. The stress test, or even the very idea of a stress test, is an effort to buy time where there clearly is no plan.

I think that the government's decision not to nationalize and to increase its equity position in Citibank and guarantees to Citibank and Bank of America is a mistake. It wastes enormous amounts taxpayer money and it avoids the ultimate reality that these institutions need to be reworked. Nouriel Roubini refers to these banks as unsustainable zombies and says that they need to be nationalized, reworked and then made public again. Roubini also believes that the bear market cannot end until these banks are reworked. I subscribe to that view. (Roubini also believes that Chase and Wells Fargo will follow to zombie status which I hope is not the case).

Citibank and Bank of America are easy solutions. AIG is more difficult, and the open question is whether AIG could be allowed to fail right now without bringing down the entire economy.