The stress test exercise seems to be blowing up in the faces of everyone. Banks are disputing the criteria, lobbying for more time to raise capital and generally trying to discredit the whole exercise.

From the NYT:

As Washington pushes banks to mend their finances, the banks are pushing back.

Emboldened by newfound profits and eager to shake off federal control, a growing number of banks are resisting the Obama administration’s proposals for fixing the financial system. Lenders that skirted disaster only months ago with the help of taxpayer dollars are now balking at government prescriptions.

Despite pressure from federal regulators, industry executives are taking issue with major elements of the president’s bank plan. Administration officials characterize each part of their three-pronged approach as crucial to bolstering banks and restarting the economy. But bankers are increasingly eager to extricate themselves from the government’s grasp, and worry that Washington will impose new restrictions on their businesses if the government’s already considerable role in the industry grows.

“The pushback has been pretty hard,” said Frederick Cannon, the chief equity strategist of Keefe, Bruyette & Woods and a specialist in banking stocks. “If we don’t address these issues, that could have a negative effect on economic growth, which in turn makes the banks’ problems worse.”

This is the natural result of not having tackled the problem from the outset. Maybe I should restate that. This is the natural result of not having regulated the industry for a decade. The bottom line here is that the Fed, FDIC, SEC and the rest of the alphabet soup had no handle, no data and no clue as to what the industry was up to. When the reality hit them full on, the best they could do was devise this ridiculous exercise in order to plug the holes in their data.

Risk was allowed to build to a level that makes the resolution of the biggest both a political and financial non-starter. By consistently avoiding hard choices and engaging in populist rhetoric, the political class has painted themselves into a corner with no exits. 

Make no mistake, the banks aren’t intimidated. They wouldn’t be fighting back like this if they were. In the end, the government is probably out of its weight class. When you’re up against a bigger opponent and have a chance to take them out you have to do it. If you let them off the canvas they’ll pummel you. They’re pretty clearly off the canvas.