Wishful Thinking

Times cheerleads White House’s hope for bank stress tests

The results of the long-feared bank stress tests will be announced on Thursday, but that’s too long to wait for the New York Times, which, in a front-page article today headlined “Tests of Banks May Bring Hope More Than Fear,” attempts to foreshadow the investigation’s conclusions. While many fear that the tests will expose substantial weaknesses in leading banks’ balance sheets, Times reporter David Leonhardt slants his reporting to see sunshine and roses amidst ambiguity and questions. Although the Obama administration hopes that the test results will encourage more investment in the banks, Leonhardt should have shown more skepticism in his reporting.

After the headline portends “more hope than fear,” the two subsequent subheads offer more evidence of White House white washing: “Losses are ‘Manageable’” and “Washington’s Report Is Intended to Influence Invest Attitudes.” The ‘manageable’ quote comes from an unnamed source.

The administration is expected to make the case that the needs of the troubled banks can be met with the bailout funds that Congress has already approved. That would be a departure from what administration officials were saying as recently as March and evidently reflects the recent improvement in banks’ conditions.

None of these banks are insolvent,” said a senior government official, who did not want to be identified before the public release of the test results.

The official added: “These are manageable losses.”

That’s the article’s only voice of hope. The only other sources in the piece are a neutral voice from an economist:

“Everything has been in limbo, waiting for the stress tests to get out of the way,” Louis Crandall, chief economist at Wrightson ICAP, a research firm. With the results, Mr. Crandall said, “we’ll start to get a sense for the extent to which the financial system can recapitalize itself.”

… and a voice of skepticism from Goldman Sachs:

There are signs, though, that the assumptions will be tough enough to satisfy some skeptics. Jan Hatzius, a Goldman Sachs economist, has a more pessimistic outlook than many forecasters, and he said that he initially thought the stress tests would not take a sufficiently dark view.

“But we are changing our mind about this,” he wrote in a note to clients last week. The tests now seem likely to assume loan-default rates higher than those of the Great Depression. Putting together a plan for the financial system to withstand such losses, Mr. Hatzius wrote, “would be a big step toward a resolution of the crisis.”

There’s little doubt that the White House sees these tests as a sunshine treatment for the economy. Once investors know where the banks stand, they’ll have more confidence in investing, the thinking goes. And, for the administration, spinning the results in a positive manner is paramount. Any hints that the tests contain bad news could tank the markets and scare away investors.

Reporters are always looking for good news to report about the economy, amidst the doom and gloom. But, as Leonhardt himself reports:

One way or the other, the stress tests have the potential to be a turning point in the financial crisis. If the tests fail to instill confidence, it will be the clearest sign to date that economists who have criticized the administration may be right that its rescue plan has not been aggressive enough.

President Obama may then need to ask a wary Congress for billions of extra dollars to shore up the credit system and perhaps even take over one or more large banks. Such moves, coming just after the administration offered a hopeful picture, could create political difficulties.

But if the test results can persuade investors that many banks are in the early stages of recovery, investors may then become more willing to invest in relatively healthy firms, like Goldman Sachs and JPMorgan Chase, which, in turn, would become more comfortable making loans.

That’s a lot of “ifs” and “mays” and “potentials”. (Otherwise known as “too early to call.”) It may have been tempting for Leonhardt to write a story with an insider quote hinting that the test results look good, but skeptical reporters (and readers, too) know better than to trust anonymously spoken positive spin. Of course, the administration hopes and wants the tests to be positively received. But we can wait until Thursday to report the facts, instead of preemptively reprinting anonymous spin.

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Katia Bachko is on staff at The New Yorker.