Some pretty encouraging news from this New York Times piece about the stress tests:
Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry. ...
At a recent breakfast with a dozen or so corporate and banking executives in New York, Treasury Secretary Timothy F. Geithner warned he would take a tough stance. Many banks, he suggested, believe the investments and loans on their books are worth far more than they really are, according to a person who attended the meeting.
Mr. Geithner said that was unacceptable. The banks, he said, will have to sell these assets at prices investors are willing to pay, and so must be prepared to take further write-downs.
It sounds like Geithner has pretty realistic goals for the sale of the toxic assets: Get them off the banks' balance sheets so we can see how big the losses are and begin to recapitalize the banks--possibly with private capital (I think it's unlikely that private investors will want to fill the hole, but worth a shot) and, failing that, with public money. There doesn't appear to be any delusion that the sale of the assets will somehow solve the problem itself, or about the value of the assets. Increasingly, the whole point of the exercise seems to be forcing the banks to come clean about this stuff.
All in all, very reassuring.