Well, looks like stress tests have some fans after all. Short sellers. Are we the only ones amused that the unintended consequences of inflicting stress tests on banks include a big spike in the administration’s second most hated side-effect of financial markets- short selling? (The first is when Volcker calls fifteen times in a row and won’t just leave a voice message).

The number of Citigroup Inc. shares borrowed and sold short increased sixfold since Feb. 27, the day the U.S. Treasury announced it would convert some of its preferred shares in the New York-based bank into common stock.
Short interest in Bank of America Corp., MetLife Inc. and American Express Co. climbed more than 40 percent in the same period, according to data compiled by Bloomberg. In total, short sales of the 18 publicly traded financial companies undergoing government stress tests were twice as high on April 15 as they were at their peak last year in July, two months before Lehman Brothers Holdings Inc. collapsed.

Do we have to remind the banks in the room that a steady regimen of diet, exercise and short selling will shed pounds (or dollars) off those balance sheets quite quickly?
Short Selling of Banks Accelerates as New Financial Stress Test [Bloomberg]

We knew to expect a bit of a circus during “Stress Test Release Week,” (and we loved the theater of making bank heads come in for their results- it’s parent teacher conference time again!) but it has gone from shabby (no immediate release of results?) to beyond theater of the absurd. (GDP projected to increase in 2010? Please, bitches). And, they are actually called Supervisory Capital Assessment Programs. (SCAP). That’s just too easy.
Oh, did we mention? There is an appeals process. Like arguing with your English Literature 505: The Elizabethan Era over the impact of Christopher Marlowe’s death. (I swear she had a crush on the dead man). Oh, and there is “Bespoking.” That’s when adjustments are made on the test for the specifics of each institution. We used to have a different word for it when they used to do that in the local school districts after the testing requirements descended: Cheating.
Is it just us, or has the media taken the bait hook, line and sinker. This might have been a clever bit of propaganda, permitting the media to go wild over the tests, withholding them from public view for weeks while the feeding frenzy builds. Playing CNBC for everything it is worth is actually kind of amusing. One almost wonders if all the fuss will obfuscate the basic fact that the tests are basically useless.
There is also a case that the government is legally required to take prompt action if it discovers a given institution is in trouble. Actively concealing the results of a financial health test really doesn’t sound much to us like the kind of thing governments should be engaged in. Unless you are a bank CEO, you see, you are not getting a copy until May (that is, unless someone *ah-lloyd-em* would like to leak them to us, which would be much appreciated).
Bank Officials to Hear Results of Stress Tests [The Wall Street Journal]
The Supervisory Capital Assessment Program: Design and Implementation

Competition between stress tests is heating up even as we type this entry. Not content to wait for indeterminate periods on sketchy results of questionable value, some aspiring outsourced regulators have designed their own stress tests. Early results are as daunting as their methodologies are mysterious and, of course, the most dramatic predictions tend to draw the most headlines. Like those on Dealbreaker, for instance. To wit:

U.S. banks may need another $1 trillion in capital to cushion losses as unemployment rises and borrowers fall behind on payments, KBW Inc. analysts led by Frederick Cannon said today.
The estimate is based on the analysts’ own “stress test” of the strength of top U.S. lenders, Cannon wrote. The government is also evaluating the ability of banks to withstand a deepening recession. Bank of America Corp., the largest U.S. lender by assets, may be forced by the government to accept additional aid by converting preferred shares into common stock, Cannon said.

Banks May Need $1 Trillion After U.S. Tests, KBW Says [Bloomberg]