The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” that will gauge their ability to weather the recession, people familiar with the matter said.
The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.
“If you allow banks to talk about it, people are just going to assume that the ones that don’t comment about it failed,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.
Regulators are using the tests to determine whether the 19 biggest banks have enough capital to cover loan losses during the next two years if the economy shrinks, unemployment surges and housing prices keep declining. The tests are a linchpin of the plan Treasury Secretary Timothy Geithner announced in February to bolster confidence in the nation’s banks and restore financial-market stability.
Geithner has likened the stress tests to those used by doctors to evaluate a patient’s health. They’re designed to mesh with the administration’s effort to remove distressed mortgage assets from banks’ balance sheets. The Fed is overseeing the administration of the tests, people briefed on the matter say.
President Barack Obama is scheduled to get a progress report on the tests today during a meeting with his economic team. Geithner will attend, along with Federal Reserve Chairman Ben S. Bernanke and Sheila Bair, chairman of the Federal Deposit Insurance Corp.
Goldman Sachs plans to report first-quarter earnings April 14, followed by JPMorgan Chase & Co. on April 16. Citigroup reports April 17, and Morgan Stanley announces April 21. All four banks are based in New York.
Spokesman for the banks declined to comment.
“No matter what the result, the stress tests are going to move markets,” Camden Fine, president of the Independent Community Bankers of America, said in an interview yesterday. “That’s the tricky part. If they don’t give out enough information or the information is presented in the wrong way, that could cause markets to plunge.”
Silent on ‘Process’
Banks should stay silent because a focus on the tests would be “a harmful distraction” from earnings, said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable in Washington.
“It is premature for banks to talk about the stress tests,” Talbott said yesterday. “They aren’t finalized yet and there is no framework to evaluate the results.”
Wells Fargo & Co. Chief Financial Officer Howard Atkins declined to discuss the tests yesterday after his bank reported a record first-quarter profit that beat the most optimistic Wall Street estimates.
“We haven’t commented on regulatory matters and we won’t start now,” Atkins said in an interview. “We don’t comment on the process.”
In a separate interview later, Wells Fargo spokeswoman Julia Tunis Bernard declined to say whether the bank had been told by regulators to keep silent. “We don’t comment on our discussions and conversations with regulators and officials,” she said.
Under the Treasury’s plan, banks would have six months after the reviews to raise any new capital they might need. If the money isn’t obtained from private investors, the government will provide the funds from the $700 billion bank-rescue plan.
Comment by Yves Smith on Calculated Risk:
What ever happened to transparency? This suggests the results are very ugly for some banks.
It's amusing that the article mentions Citi - I doubt Citi wants the results released!