by Ofuoma Odje

Created on: May 03, 2009

Are there any ulterior motives behind the Government so called "Stress Test" on 19 of the Nation's Largest Banks?

On April 4th 2009, Treasury Secretary Tim Geithner testified before a congressional oversight committee headed by Elizabeth Warren and stated that "the vast majority" of banks could be considered well-capitalized.

If this is the case, why is the Government still talking about the stress test and the possible ramifications for the banks?

Why is there so much back and forth between the Banks and the Treasury over the stress test? And why are the results still being delayed?

The true motives behind this stress test are still unclear at this time, but certain conclusions can be drawn based on the chatter from the Treasury and other Government officials.

From an objective point of view, the stress test looks like a directed effort at State control of the banks deemed to need more capital by the Treasury.

In other words it appears the so called "Stress Test" is a backdoor to nationalization of the nation's largest banks, to more TARP money from congress, and Government direction of the banking industry.

This means that key functions like control over executive compensation and ousting of CEOs that were formerly reserved for shareholders could now become exclusively reserved for the government.

Treasury Secretary Gaithner made it clear that none of the 19 banks will be allowed fail.

This surely reveals that if necessary, he intends to go back to congress for more TARP money in order to re-capitalize banks deemed as weak per his "Stress Test".

If this is the case, the stress test is a political exercise that could expose nearly a Trillion Dollars hole in bad assets amongst these 19 banks.

What does the Government plan to do about under-capitalized banks?

The Government has said that Banks needing more capital will be given 6 months to raise such capital privately, after which they must accept government funding.

The government is currently considering 2 options to address the under-capitalized banks.

Since the TARP funds are running low, the first and most likely action will be to follow the Citigroup model, where the government converts the Banks preferred shares it acquired via TARP funds into common equity.

But what good does this conversion really do? Let's look at this scenario and its ramifications.

Currently, the Banks have to pay interest to the Treasury on the preferred shares it exchanged for TARP loans. While the government receives interest on those preferred

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