updated 3/1/2009 2:02:01 PM ET 2009-03-01T19:02:01

Lost in all the hype over the just rolled-out "stress tests" of the nation's banks is this noteworthy fact: The banks are going to do some analysis of their books by themselves.

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If anything has been learned from the current crisis, it's that banks are terrible at assessing their financial health. They've repeatedly downplayed the size of losses and their capital cushions since the meltdown in the industry began nearly two years ago.

Yet Treasury Department says the government is allowing them to do just that under the new "Capital Assistance Program" intended to bolster confidence in the banking system. With this structure, it might not.

"It sounds like letting Barry Bonds do his own testing on whether he is taking steroids. Imagine that!" said Robert Brusca, who runs the research firm Fact and Opinion Economics.

It's just the latest example of a government program that's aimed at resolving the banking crisis but is more likely to come up short. U.S. leaders have been tough with the rhetoric, but their actions can't seem to fix much of anything.

This program will have 19 of the nation's biggest banks, all with assets topping $100 billion, partake in "stress tests." The goal is to gauge if these institutions — Bank of America, Citigroup Inc. and Wells Fargo & Co., to name a few — have ample capital to survive a downturn that could be even more severe than the current recession.

The government is giving the banks detailed direction of what to measure, but the specifics have not been publicly disclosed.

The banks will then be charged with doing the analysis of their loan and securities portfolios and off-balance sheet commitments, according to the official Treasury Department's description of how the program will work. The banks will also forecast if they have the resources to absorb future losses.

Then they will report their findings in a "standardized template" provided by the government agencies overseeing this process, the description said.

After all that is done, the regulators and bank officials will discuss the results. To be sure, regulators can challenge the banks' findings or any assumptions made in the banks' valuations. They will then decide how much capital will be needed if economic conditions weaken.

Those lacking capital will be required to raise more through private sources, and must do so within six months. Banks can apply for additional government funds after the capital assessment is complete, but there will be a six-month waiting period to see if they can first raise private money. New federal support will come by way of the government's purchase of preferred shares of bank stock, which then could be converted into common shares.

Funding for those investments initially will come from what's left of the $700 billion Troubled Asset Relief Program that Congress approved last fall. On Thursday, the Obama administration said it anticipates an additional $750 billion may be needed to bail out the nation's banks.

While the biggest banks already have regulators on site, they don't amount to the kind of manpower needed to oversee every step of the banks' financial analysis. That is why the self-assessments had to happen, said banking industry consulting Bert Ely. He also noted that banks have complicated internal financial systems that only their employees can navigate.

But that still can't overshadow the risks inherent in having banks doing their own analysis.

"This crisis was caused by mis-modeling of risk by financial institutions," said Joshua Rosner, managing director of the consulting firm Graham Fisher & Co. Inc. "To come up with a black-box model of capital risk for banks in a few weeks is something that won't work."

For the latest evidence of how financial companies often can't get things right, just look at what Merrill Lynch disclosed late Tuesday in a securities filing: The securities firm's 2008 losses were about $533 million more than previously reported. That boosted its full-year loss to $27.61 billion from the $27.08 billion it reported just last month.

Blame the upward revision on an error in how it recorded transactions tied to hedging. That's more bad news for Bank of America, which acquired Merrill on Jan. 1 but had to get a $20 billion government loan in order to absorb the investment bank's bigger-than-expected losses.

It was hardly the first trip-up for Merrill in the last two years.

It's hard to forget what then-CEO John Thain boasted last summer. "Right now we believe that we are in a very comfortable spot in terms of our capital," he said July 17 when Merrill reported its fourth straight quarterly loss and write-downs from failed investments approaching $40 billion.

Two months later, it was forced into the arms of Bank of America to avoid collapse like rival Lehman Brothers Holdings Inc.

Rosner thinks in six months there will have to be another round of stress tests or something else, because the latest attempt to resolve the problems with troubled banks won't change much of anything.

Part of the problem is that the government doesn't seem to know what to do, so it keeps trotting out plans that keep troubled banks kind of alive. Maybe that's the point — it's reduced to buying time, hoping that markets fix things for themselves.

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