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For banks, stress tests lead to judgment day

At the Federal Reserve Bank of New York, the guard was up both figuratively and in reality.
At the Federal Reserve Bank of New York, the guard was up both figuratively and in reality.Louis Lanzano / AP
/ Source: The Associated Press

It was the banking industry's equivalent of Judgment Day: Dark-suited bank executives called in to top-secret meetings with Federal Reserve officials to learn whether their institutions might live or die if the economy took a sharp turn for the worse.

The disclosure of the stress-test results to the nation's 19 biggest financial firms made for high drama on Wall Street, which buzzed with anticipation even though the banks' report cards won't be made public until early next month.

Bank executives learned their grades in meetings at Federal Reserve banks across the country. The proceedings were shrouded in secrecy. By law, the banks can't publicize the results without the government's permission. Most banks refused even to confirm that the meetings took place.

The stress tests are among the ways the government has tried to restore confidence in the banking sector amid the gravest financial crisis since the Great Depression.

Goldman Sachs President and Co-Chief Operating Officer Gary Cohn met with officials at a conference room in the Federal Reserve Bank of New York, a neo-Florentine fortress that sits atop the world's largest gold repository.

Cohn was joined by members of Goldman's risk management division, according to a person familiar with the meeting who asked not to be named because he wasn't authorized to discuss the matter. Goldman CEO Lloyd Blankfein couldn't attend because he's overseas.

Hours later, John Mack, CEO of Goldman rival Morgan Stanley, arrived in a silver Audi sedan with dark-tinted windows. Accompanied by three associates, Mack showed his ID to security and entered the building's main entrance, a few feet from where tourists line up for daily tours.

Forty-five minutes later, the Audi pulled out of the rear entrance. Police blocked traffic and let the car speed off the wrong way down a narrow street in Manhattan's Financial District.

Morgan Stanley spokesman Mark Lake refused to confirm that the meeting took place.

The air of mystery fed Wall Street's anticipation. On the financial news network CNBC, a countdown clock ticked away the seconds until the Fed's 2 p.m. EDT release of the methodology used to conduct the stress tests.

When the hour arrived, financial stocks mostly rose after Federal Reserve said the government would rescue any of the 19 financial firms if they were weakened by a deeper recession.

The disclosure of the test results was carefully orchestrated. Giving the banks their results Friday, more than a week before they're to be released, is supposed to give them time to process the data internally.

The Fed, which is overseeing the tests, asked banks not to reveal their results during quarterly earnings announcements. Regulators worry investors might batter those banks without any good news to announce.

That concern is shared by many banking experts who say it's hard to predict how the results will be received.

Bert Ely, a longtime banking analyst, said he worried the tests could backfire by unnecessarily alarming investors.

"This whole thing has the feel of an inquisition," Ely said. "We're going to get a warts-and-all look at the banks, and the market may overreact."

Wary of sending mixed signals, most banks refused to discuss any aspect of the tests. Only one, PNC Financial Services Group Inc. even confirmed that it met with regulators.

Regulators arrived at the Pittsburgh-based firm's offices Friday morning, spokesman Brian Goerke said.

"Senior executives were there," he said. "That's all I know."