Chris Whalen, managing director of Institutional Risk Analytics, says results from the upcoming government stress tests are more about public posturing by the government than getting to the bottom of the economic crisis. Whalen, who has worked as an investment banker and research analyst for years, has not been shy about expressing his bearish views on Citigroup ( C) and AIG ( AIG). His company already has released its own bank grading system ahead of the government's bank stress tests and currently advises customers that are looking to acquire banks. Whalen spoke with TheStreet.com last week about the bank stress tests. TheStreet.com: We've got some bank stress tests, what is going to be the effect on our new bank holding companies? Whalen: The point of the stress test is political. It's about building a narrative so that they can explain to everybody what's going on. It's also about buying time. My sense is that the stress tests are going to go like this. Most banks will pass. The Treasury will indicate that some need more capital and they will put more capital into them. But I think if we're gonna be more credible, a couple of banks will have to fail. The whole point of having a test is that some people pass and some people fail.
Don't you think they are kinda cooked? They don't want to come out and say this bank is in trouble because then there will be a run on the bank. Well, that's right. In a sense they've painted themselves into a corner. The Treasury, Barney Frank, everybody said, well, we have to have transparency. We're gonna reveal the results of the stress test, but the reality is the bank regulators never say anything about a specific institution unless it fails. So we have this conundrum whereby the regulators are apparently going to tell us something on the fourth of May that relates to how these banks did on their stress test, but I can't see how that's going to be beneficial. Because if you say JPMorgan ( JPM) is good and Citigroup is bad, then we're gonna have a run on Citi that day. The naiveté and lack of experience that's evident in the Treasury and the White House with respect to bank supervision is such that they don't realize that regulators never commented publicly about the soundness of a bank.