Nineteen major banks worth more than $100 billion will face a mandatory "stress test" to judge whether they have enough capital to survive another steep drop in housing prices or a sharp increase in unemployment rates.

Those that fail would have six months to raise money from the private sector, or would receive additional capital injections from the government in the form of securities that could be converted into common stock at a 10 percent discount to the price before Feb. 9.

Common stock carries voting rights and could hand the government greater influence over the banks that take on additional money -- or the executives who run them -- but the government would no longer be in a more senior position to be paid dividends or paid back first in the event a bank collapsed.

Also, existing shareholders could have their stakes further diluted if the government converted preferred shares to common stock.

[snip]

The stress tests will use two economic situations to determine a bank's health: consensus projections of how the economy will fare in the next two years, and more pessimistic outlooks.

Under the so-called baseline expectations of the economy's performance, unemployment will rise to 8.4 percent this year, economic growth will contract 2 percent and home prices will fall 14 percent.

A worse outlook envisions home prices falling 22 percent this year, the gross domestic product contracting 3.3 percent and unemployment rising to 8.9 in 2009 and 10.3 percent in 2010.

The government said the stress tests would be finished as soon as possible, but no later than the end of April.

And in the middle of the article, this:

The Treasury and Fed are also expanding programs to unlock commercial credit and planning a $1 trillion public-private partnership to entice investors to buy troubled mortgage-related assets from banks.

The plan would require banks that take on additional government money to comply with executive pay limits passed under the $787 billion economic stimulus package, and would require banks to be more transparent about how they use taxpayer dollars.

"Banks must submit a plan for how they intend to use this capital to preserve and strengthen their lending capacity -- specifically, to increase lending above levels relative to what would have been possible without government support," the Treasury Department said in a statement.

What is not clear to me is whether the banks that get help via the trillion-dollar plan are those that are not being subjected to the stress tests - are these the still-healthy banks that will benefit?

On the other hand I understand, and have tended to engage in, the kind of wishful thinking that Kevin Drum is engaged in.  Economists like Krugman and lawyers like us demand and need facts to do our jobs and are therefore irritated when those facts and details aren't presented.  Politicians do whatever is politically necessary.  And in this case it might be necessary to deceive until the bitter end to avert a bigger Wall Street catastrophe.

I don't think that the announcement today about the stress test details negates the possibility that there is necessary deception going on.  If the plan requires deception up until the day of the final announcement about what is going to happen to the banks then ... in for a penny in for a pound.

Save or create?  How is stopping the bleeding (saving the jobs) stimulative?  

"Can't offend the shareholders"...that one always cracks me up.  If only OTB or the Borgata were as averse to offend.  

Do you wipe out the preferred stockholders?  Do you zero out the bondholders?  How far down the capital structure do you go?  How could you possibly know, when you have no idea what the assets are worth (and don't tell me about mark-to market, there is no functioning market)?

If you just decide, arbitrarily, to wipe out all the preferred stock and bondholders, even though the bank is current on all obligations and has no liquidity issues, why shouldn't every bondholder in every industry in America get worried they're next--that's hardly encouraging for capital raising.

And who's going to run the bank?  I assume "nationalization" means "get rid of them", but who should the government get to trade out of CDOs, match assets and liabilities and conduct regular business?  Other guys from Wall Street?  Me?

Oh, and when the government owns the $1 Trillion in assets and since we all know it doesn't really want them, well I can just imagine the fire sale that would go on.  Do you think the gov't can get good prices on them from private equity?  

I'm not saying I have the right answers, or that  the stress testing will be perfect, or that putting more money in is ideal, but "nationalization" is a word, not an answer at all to any of these questions.

Bizarre.  Finances are not yoru typical lawyer's strong suit and I fear Obama may be relying on the wrong crowd to solve this problem.  How can Geithner insist with a straight face that the private sector provides the best leaderhsip for these banks and best guardians of the massive public investment?

second: Go after these criminals offshore accounts.

Re BTD's remarks about Clinton: Is there anyone who thinks Bill Clinton, working for HRC or Obama, would do a worse job running the US economy than the current gang? Is there anyone who thinks investors around the world are happier seeing BHO running things than HRC and WJC? Acorn and Chicago versus two successful terms and balanced budgets.

Feb. 25 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner said that a government takeover of troubled banks is unnecessary for solving the country's deepening economic and financial woes.

Nationalization "is the wrong strategy for the country and I don't think it's the necessary strategy," Geithner said, according to a transcript of an interview on public television's "The News Hour with Jim Lehrer" to be broadcast later tonight.

"Sheila C. Bair, the head of the Federal Insurance Deposit Corporation, said on Tuesday that the nation's banking industry was safe. "All these large banks exceed regulatory standards for being well capitalized, so for right now, they're fine," Ms. Bair said on CBS television's "The Early Show."