Over the last week two distinct stories about the bank “stress tests” have surfaced.  First, the Treasury was going to delay the release of stress test information until after earning season as to not cause any panic on Wall Street. The second, the Treasury allegedly told the banks that underwent the stress test to not release any information regarding the test results.

Travel back to 2002 with me, a time when the public was enraged with the scandals of Enron and WorldCom.  The public demanded accountability of financial information (well, politicians did – the public was more pissed that their retirement savings were wiped out) that was coming out of publicly traded companies.  

Enter the Sarbanes-Oxley Act (SOX).

Once instituted, SOX mandated a number of controls public companies had adhere to when reporting financial information.  One such control was “enhanced financial disclosures” which focused on internal controls that would assure that financial reports and disclosures were accurate.  The Act also called for timely reporting of material changes in corporate financial data.

You see the problem here?

If the financial stress test shows the financial data currently reported by the banks to be incorrect, and the bank management is aware the results of the stress test conflict with their own internal data, the banks are legally required to report the discrepancies.

The Treasury is, essentially, telling banks to ignore the law.

What happened to transparency in government and corporate financials?  How can one department of the government tell public companies to ignore federal law?  Better yet, why is no one calling attention to this?

The controls enacted in SOX were intended to provide transparency and accountability within publicly traded organizations, yet here the government is telling publicly traded companies to ignore transparency.

Something does not add up.

For months now, the Fed and the Treasury Secretaries (Paulsen and Geithner) have expressed confidence in the free market. Extreme market conditions call for unprecedented actions by the government, all in the name of propping up the U.S. financial system. What if, however, there is more at work?

Yesterday, the Fed refused to provide information on what financial institutions obtained money. The reasoning? Such information would potentially damage the reputations and/or create a lack of confidence in banks that obtained money.

Fed Refuses to Release Bank Lending Data, Insists on Secrecy

The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.

If you note, the same article points out:

Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.

What changed between September and now? Aside from the economic desperation increasing more than anyone could have expected, not much else. Auditors, economists and government officials all knew the financial institutions were facing insolvency. The financial markets were well aware then, as they are now, the banks were on the brink. As such, it is hard to make the argument that confidence in banking system would be tarnished by releasing information showing who received money.

The damage is done; the horse is out of the barn.

While reassuring to hear the Fed say transparency would be forthcoming, the reality is the Federal Reserve acts independently of Congress and the President. This body has the ability to do whatever they wish, without the need for government approval and have no duty to explain their actions to a governing body.

Maybe the lack of transparency comes from the Federal Reserve deciding who is going to survive the crisis? Maybe the Federal Reserve is taking advantage of the credit crisis in order to reshape the financial system after years of neglect.

I do not wish to sound paranoid, or some crackpot conspiracy theorist, but looking at the whole body of evidence it is clear the Federal Reserve, as well as the Treasury, is withholding information for some unknown reasons. Be it a lack of economic understanding, or something more calculated, it’s clear there is an undercurrent the general public is being left out of.

If the actions of the Federal Reserve are designed to select the survivors of the financial crisis, and not let the market direct such a decision, this would be a clear sign that the idea of capitalism as the world believed it to be was a failure.

I have no question that the creation of a Resolution Trust will help establish a baseline for the mortgage industry, making a market for the bonds / loans collected by the Trust but what is the scope of institution the Government is looking to create?

From the iht:

Foreign banks, which were initially excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic U.S. mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks.

Why do we have to bail out Foreign banks, be it an American unit or otherwise? I can almost guarantee these foreign banks are now transferring bad debt from their parent entity to American units in order to cover their losses. From a thought experiment perspective, how many other countries do you think would be willing to bail out U.S. based companies? While I don’t know the answer, I would be willing to bet that list is short…. VERY short.

Again, we are on the right path with a Resolution Trust IF the trust is structured propertly and addresses issues facing the United States, not issues of other countries.