Weeks ago when it was stress-testing troubled banks, "the United States Treasury... started to feed information about the banking stress test to the (Wall Street) Journal which then proceeded to write a series of articles... suggesting serious problems in the banking industry... Thousands of investors were selling these stocks based on (the Journal's) information," writes veteran bank analyst Richard X. Bove, now of Rochdale Securities, Connecticut.
"Then the actual results of the stress test were released (last week) and investors discovered the banking industry was in strong enough condition to withstand a Depression-like hit to their loan portfolios... Bank stocks rallied strongly.
"The fundamental problem may have been that the Journal may have been attempting to sell a point-of-view and not providing balanced reporting. Or, it could just be that the Journal simply does not understand the banking industry...
"The stress test demonstrated that the banks are not insolvent but actually are in position to grow their balance sheets. The Treasury-leaked reporting in the Journal provided no indication of this possible result and, therefore, provided investors with inaccurate signals. Apology required."
Bove concludes that the stress tests, while proving the banks are more or less solvent, will make them want to conserve capital until the economy recovers, instead of lending aggressively to end the recession early, as the government wants them to do.