The results of the Federal Reserve's "stress tests" on 19 of the country's largest banks were among Washington's worst-kept secrets, with abundant leaks about the multibillion-dollar capital shortages at Bank of America and other giants. So it came as little surprise Thursday afternoon when the Fed's Board of Governors announced that only nine of the banks had come through the tests with no need for additional money.
The other 10 will be required to raise nearly $75 billion from either private investors or the federal government. That amount was less than some observers had feared, and Treasury Secretary Timothy F. Geithner called the results "reassuring." But our reaction is just the opposite. We're dismayed by the prospect of the government taking an even bigger stake in the banking industry. And we're still waiting for some market-based mechanisms to deter banks from becoming so systemically important that the government is compelled to rescue them.
It's probably misleading to describe the Fed's assessment as a test -- there was no chance of failure. In fact, the whole point was to tell financial markets two ostensibly encouraging things: that each of the 19 banks could survive a worse downturn than most economists expect (although some would need more capital to do so) and that the government stood ready to provide this capital if private investors would not. In other words, the underlying purpose of the exercise was to show that the government would not let any of the companies be scuttled by the recession, tight credit markets or their own bad bets.