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Do We Really Want The Results Of Those Stress Tests?

The Journal says there's still a lot of uncertainty about whether and how much of the stress-test data to release:

It isn't clear precisely what information the government might disclose. It remains possible the data won't be specific to individual banks. But some within the administration believe a certain amount of information needs to be released in order to provide assurance about the validity and rigor of the assessments. In addition, these people also are concerned that the tests won't be able to fulfill their basic function of shoring up confidence unless investors are able to see data for themselves.

In response to which, Ryan Avent, the former Economist blogger who's apparently replaced Felix Salmon at Portfolio, makes a good point:

The problem is this -- if the administration releases information suggesting that the tested banks are all basically fine, then the data is worthless. Markets will go on speculating on which banks are in the most trouble (and possibly be more pessimistic, generally, based on the government's bungling of the tests). If the administration provides meaningful information of any kind, on the other hand, markets will naturally assume that the weakest looking banks are the weakest banks, and will begin trading accordingly.

In response to which, Salmon himself makes a good suggestion:

The way out of this problem I think is for the government to recapitalize the weakest banks before it releases the stress-test results, and then to release post-money stress tests showing that, as a result of its recapitalizations, all the tested banks are basically fine. It’s a risky strategy, but I don’t think Treasury has much choice at this point.

For what it's worth, I'm still not convinced aggregate data is a worse idea than bank-level data, at least under the circumstances. I know Salmon and others think opacity is dumb and possibly self-defeating. But my thinking is this: If Treasury ends up having to reveal results about individual banks, then it strikes me as highly unlikely that the data will be meaningful. As various Treasury officials have already said, all 19 banks are going to pass. If, on the other hand, Treasury only releases aggregate data, there's a chance it could be worth something. I guess I'd much rather have accurate overall data, so we know how screwed our banking system is, than bogus individual data.

Having said that, I'd still prefer accurate overall and individual data. And I guess it's possible we could get that if the assumption all along had been that Treasury would only release aggregate data, then at the last minute someone high up (Geithner, the White House, etc.) insisted we come clean with all of it. Othwerwise, I think releasing bank-level data would not only be useless in itself, it would result in useless aggregate data, since the numbers have to be internally consistent.

P.S. Also, if Treasury releases accurate overall numbers, and the healthier banks start releasing their own numbers unilaterally, then we should eventually be able to identify the comatose banks. So, paradoxically, releasing aggregate data alone seems like it could lead to useful aggregate and individual information, while releasing individual data seems like it would lead to inaccurate data at both levels. Okay, I'm done with this.

P.P.S. Apologies for the light posting lately. I'm crashing on another long piece--this one co-written with Frank, no less. I should be at full-speed next week. Actually, more than full-speed, as we'll be unveiling some exciting Stash, er, enhancements. Stay tuned.

--Noam Scheiber