The ever changing model of nationalization took another leap towards a resolution of sorts today. Bernanke’s new plan amounts to a game of hide and seek, hoping the mess resolves itself over time. Please consider U.S. Will Take Bank ‘Ownership’ Stakes Only as Losses Climb.

The Treasury will buy convertible preferred stock as needed in the 19 largest U.S. banks after stress tests to determine how much capital is needed to address losses in a “worse” case scenario, Bernanke told lawmakers at a Senate Banking Committee hearing today. The shares will be converted to common only as the extraordinary losses happen, he said.

“It doesn’t have an ownership implication until such time as those losses which are forecast in the bad scenario actually occur,” the Fed chief said. Bernanke also said that the so- called stress tests that regulators will run on the 19 banks will look at potential losses over a two-year horizon if the economy worsens.

Bernanke’s remarks come after some investors expressed concern that the Treasury’s capital-injection plan would hurt banks’ shareholders and lead to government ownership stakes. The chairman added that it will be up to Treasury Secretary Timothy Geithner and the Obama administration to determine whether more bailout funds will be needed from Congress.

“How much more we’ll have to do depends on the state of the banks, it depends on how the economy evolves and it depends on the margin of safety we think we want to have,” Bernanke said today. He separately warned that “if we don’t stabilize the financial system, we’re going to founder for some time.”

My Translation: “The banking system is going to flounder like a fish out of water for quite some time.”

The stress tests “will look at the balance sheets and the capital needs of each of our 19 largest $100-billion-dollar-plus banks over the next two-year horizon,” Bernanke said in response to a question from Senator Robert Corker, a Tennessee Republican.

The assessment will use “both a consensus forecast — where we think the economy is likely to be based on private sector forecasts — and an alternative which is worse,” Bernanke said.

The purpose of the reviews isn’t to provide a “pass” or “fail” grade for banks. Instead, the government wants to ensure that banks can meet their obligation to lend even if the economy worsens, he said.

My Comment: The purpose of the “stress test” is to pretend something is being done when it isn’t. No one can possibly believe any announced results. Neither the Fed nor the Treasury has any credibility at this point.

Regulators won’t let banks “hide anything” as they look at how lenders have valued their assets, and will ensure that firms are using “appropriate models” for mark-to-market accounting, Bernanke said.

My Translation: “Regulators let banks hide everything for years. Regulators will continue to let banks hide everything for years to come. This is what we mean when we say ‘appropriate models’. Of course, Citigroup will not be required to bring $800 billion or so in SIVs off the balance sheets back on its balance sheet. Furthermore, we intend to do nothing about ridiculous assumptions on the marked to fantasy prices of level 3 assets on the balance sheets of every bank. Hopefully these delaying tactics will buy banks the time they need. We realize this is unlikely to work, but what the hell? Right now, this game of hide and seek is our only prayer.”

“We’re going to do a tough evaluation,” the central banker said in response to a question from Senator Richard Shelby of Alabama, the Senate panel’s ranking Republican.

My Translation: “We’re going to do a complete whitewash and hope the market buys it”.

The game Bernanke is playing will allow the Fed to slowly bleed taxpayers to death by 100 tiny cuts. Each cut will all the Fed to inject taxpayer blood (capital) in drips to the banks while pretending the cancerous patient is in good health. Meanwhile, Bernanke is hoping the taxpayer will not notice. This is essentially the same model that left Japan’s economy stagnating for over a decade.

Mike “Mish” Shedlock
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