OOOOOOOOMMMMMM from Geithner

Now that a few days have passed since the Stress Test results were announced (cue: Valhalla motif from Das Reingold), the phoniness of the whole exercise is becoming clear. It’s true the stock markets have responded enthusiastically, but that may be less about the banks’ true state of health than their reading of the Obama Administration as just as in the tank for Wall Street as their predecessors.

Robert Kuttner of the underappreciated American Prospect points out that the numbers of inspectors sent out to gauge the fiscal health of these megacorporations were a tiny fraction of the army of accountants that would have been required to do a real job. [I read this article on Huffington today and now find it’s been withdrawn—we’ll see if it reappears.] That means the banks trotted out some succulent figures, Treasury tossed them with a sprig of arugula and vinaigrette, and we were served a tasty meal that has nothing to do with their solvency or business plans.

So no wonder the stock markets soared on the news: for those who live in that world, it was obvious the government has no intention of threatening the existence of the zombie banks, at least for now. So it was safe to plunge back into their shares, make a killing and stand by for the next chapter.

Another fascinating Huffington piece by Delaney and Grim explains why so many potential short sales are being refused by banks even at the cost of greater losses later on. They demonstrate how the bundling of mortgages into tiered securities introduced all sorts of irrationalities into the marketplace. Now, a 25% loss on a given property will wipe out an owner of the lower tranches while those on the top tiers lose nothing at all. Banks can’t get all these multiple owners to agree, and sales eventually fall through as interested buyers move on. The long-term consequences are housing market stagnation and further deterioration of bank solvency.

In addition, Geithner & Co. have now given banks a huge incentive to book profits over the next six months and show how they will earn their way out of the cash crunch. Then Treasury will reduce its requirements for new, profit-weakening capital additions. The banks thus have a gigantic incentive to juggle their reports and make things look great.

All of which sounds like more of the same that got us here in the first place just as the big hits to credit card debt, jumbo mortgages, adjustable-rate loans, home-equity and all the rest are being felt. If Krugman, Kuttner and others are right, the financial crisis of last autumn may soon be back, only this time with no opposition knights in shining armor standing by to sweep out the incompetants.