White House Announces More TARP Conditions: Stock Markets Hear More Vagaries

The Obama administration just announced a further "quality test" for US banks who received government bailout money. These banks will only be allowed to pay-back money they received during the stock market turmoil if they pass a further unspecified test of their capital ratios. That means if the treasury deems that a particular bank does not have enough capital, it will not be allowed to pay back the TARP money.

This could have major implications on the stock market prices for any bank that is part of the test. Just like the previously announced bank stress test, this new test lacks specifics and may segregate banking sector stocks into two groups: those deemed by the government to have enough capital and those stocks that do not. This may place a psychological price premium on banking stocks that pass the government's tests.

The government is providing the setup for a short term panic when these tests are finally enacted. The administration has been so vague in a time when certainties are prized above all else. In a place like the stock market, especially one that has recovered so vigorously in a small period of time, this prolonged uncertainty from the most powerful financial institution in the world is just pain dangerous. The stock market will be watching the outcome of these stress tests closely.