Buried down at the bottom of the Times article on the Obama bailout plan is this short passage …
Under the category of sticks, private investment managers are closely watching how the Treasury rolls out its “uniform stress test” for grading the health of banks. If the government takes a tougher line with more banks, it could force them to sell off more of their loans and take their lumps sooner rather than later.
Remember, the heart of the problem in the banking sector is not simply that a lot of the banks are probably insolvent, it’s that they’re not willing to admit it and government regulators are not forcing the point. Specifically, the banks are refusing to recognize steep losses on a lot of bad assets. If this stress test were to force valuing these assets at something like market values that could force the sorts of financial reorganization (i.e., bankruptcy and a period of government ownership) that is probably the only way out of this mess. That’s a big ‘if’. I doubt that’s the plan at the moment. But it’s a detail in the plan that might later be built on.
