Fed to banks: Keep mum on stress test results

[April 11, 2009]  WASHINGTON (AP) -- Federal regulators have told the nation's largest banks to keep quiet about their performance on government stress tests. They fear investors could punish companies with nothing to brag about.

In letters to the 19 banks undergoing tests of their financial strength, regulators told the companies not to disclose their performance during upcoming earnings announcements, according to industry and government officials who requested anonymity because they are not authorized to discuss the process.

The order was the latest in a series of government moves designed to keep good news about strong banks from dooming others to a downward spiral of falling share prices and financial weakness. If banks receiving the highest marks trumpet their results, the fear is investors might push down share prices of those companies that make no such announcements.

Government officials want to announce the results all at once, at the end of the month.

The stress tests are a centerpiece of the Obama administration's ongoing effort to stabilize the banking industry. They subject the banks' books to a series of negative scenarios, including double-digit unemployment and further drops in home values.

The test results will help regulators determine which banks are strong enough with current subsidies, which need more money from the government or private investors, and those not worth saving.

The letters follow public statements from bank executives about the tests, including Wells Fargo & Co. Chief Executive Richard Kovacevich's calling the process "asinine." Bank of America Corp. CEO Kenneth Lewis and Citigroup Inc. CEO Vikram Pandit both have alluded to strong performance on separate, internal stress tests in recent memos seeking to build employee confidence.

Lewis also told reporters last month he expects Bank of America to pass the government's tests.

Wells Fargo has received a $25 billion government bailout; Bank of America and Citigroup each received $45 billion.

Spokesmen for the Federal Reserve, Bank of America and Citigroup would not comment on the issue. Wells Fargo spokeswoman Julia Tunis Bernard said the company doesn't comment on discussions with regulators.

The letter echoes earlier government moves to use strong banks as cover for those that need more help. For example, then-Treasury Secretary Henry Paulson forced the nine largest banks to take capital injections all at once last fall so the neediest banks wouldn't be stigmatized.

The Securities and Exchange Commission on Wednesday opened a public debate on how to prevent downward pressure on stocks from investors betting against their performance - a practice called "short selling." Critics of the practice, including many in the financial industry, blame short sellers for causing much of the panic that engulfed financial markets last fall.

Industry groups also have groused about regulators forcing healthy banks to take bailouts. Some smaller banks already have returned the government's money - plus interest - because they were unhappy with new conditions Congress had imposed. Large banks, including JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc., have said they want to return the bailout money as soon as possible.

[Associated Press; By DANIEL WAGNER]

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.