Treasury Should Have Some Foresight and Release Stress Test Results Quickly and Simultaneously

CNBC anchor Mark Haines made an interesting talking point today on Squawk on the Street, suggesting that the 19 banks being subjected to the government's "stress test" may be required by law to disclose the results of the tests to shareholders. Haines suggested that the results would qualify as material and should be disclosed. The comment is noteworthy because Haines is a former attorney.

The Treasury has not said if they will release the results and the banks haven't said either, but how this data gets out should be a crucial consideration. Will it be from the government, from the companies or from the rumor mill?

Reports have suggested that the banks won't necessarily be given a grade, but the banks that 'fail' will have to raise more capital and likely the only source for capital for these banks will be the government. So even though we may not get formal results, we will know they failed because they will have to issue new equity to the government. But when will the new equity have to be issued? Will it be immediately or will the failed state of the bank come from the rumor mill? If data on the failed banks is coming from the rumor mill it could be detrimental to the market psyche, which is just starting to recover. The rumor mill is vicious and could also implicate perfectly healthy banks on the "this bank has loans like that bank" chatter.

Banks that "pass" the tests would likely have reason to brag about it, and their good-news-desperate PR departments would love to issue press releases about it. If the government will frown about this type of behavior is not known. Remember, the strong banks were supposedly arm-twisted into taking the original TARP money to avoid stigmatizing the weaker ones. Press releases from the "pass" banks would create the same problem.

In the case of Goldman Sachs (NYSE: GS), as we learned tonight, once they pass the test they plan to pay back their TARP money in part from money from a new $5 billion equity offering. Other banks that are having the tests preformed include Bank of America (NYSE: BAC), Citigroup (NYSE: C), JP Morgan (NYSE: JPM), Morgan Stanley (NYSE: MS) and Wells Fargo (NYSE: WFC), among others.

So whether we get equity offerings, press releases or rumor mongering, one way or the other we may have some information on who "passed" or "failed." If the government uses some foresight on this one, they may be smart enough to release the results of all the banks to everyone at the same time.

What the stress test results mean is another story. As we have been discussing, the assumptions in the stress tests look too pollyannish, with the unemployment rate already above the 2009 baseline scenario.

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