Four weeks ago the U.S. Department of the Treasury said it wouldn’t release specific results of it’s so-called stress test of the U.S banks with assets of more than $100 billion, and it even seemed somewhat reluctant to divulge more than an amorphous outline of the test itself. Last Friday the Federal Reserve released the specifics of the work-up, in the form of a white paper, under a less clinical moniker—the Supervisory Capital Assessment Program. And Treasury promises to release selected results next week. “Three or four weeks ago, they were not going to make anything public,” says V. Gerard Comizio, former deputy counsel of the OTS and SEC lawyer, and currently a senior partner in the banking and financial institutions group at law firm Paul Hastings. “This doesn’t give the appearance of a considered decision.” The public and the financial sector expect the Obama Administration and the Fed to “aim and then shoot” now that the panic of last October and November has passed, he says.
The shifting story out of Washington is spooking the market, despite relatively decent first quarter reports. But Comizio thinks a bigger story lurks behind the specifics. “I don’t think there’ll be the revelation of any state secrets,” he says. “The real story is that these examination are not exactly an endorsement of how capital is measured.” The outcome may well be the creation of new capital standards. “The days one size fits all may be over,” according to Comizio.
And the show-and-tell time will be “a pretty important week in the history of banking regulation,” he believes. “It’s been the premise for the past 100 years that the relationship between regulators and banks is sacrosanct. Now we could be crossing the Rubicon of transparency. If the examination results of 19 institutions are released, why not all?”
Meanwhile, Treasury “does not relish whatsoever” the idea of converting its preferred shares in banks to common stock, says Comizio. “Some institutions have approached the administration asking for a suspension of interest payments, on the premise that they’d be profitable or more profitable if they didn’t have to make those payments.” But it is unclear that the government would be comfortable trading the interest on its preferred shares for the voting rights that come with common stock. The administration also feels queasy about stepping in the boardroom. In any event, “they’re taking a go-slow approach,” Comizio says. “They have to knock down a lot of pots and pans to put that on the front burner.”