On Feb. 25 regulators laid out details on how they will run the “stress tests” that Treasury Secretary Timothy F. Geithner has promised on the biggest banks. Now those tests, designed to judge whether the banks have the capital to keep lending and absorb losses in a severe recession, face an exam of their own.

Much of the credibility of Geithner’s struggling bank bailout program hinges on what Treasury does with the test results. Many investors believe the banking system is drastically undercapitalized. While no one expects regulators to declare the money center banks insolvent, they are watching to see whether Geithner will allow the weakest of the examined banks to fail. “If everyone passes the test, it won’t provide [investors] any comfort,” says Andy Laperriere, a Washington-based policy analyst with the research firm International Strategy & Investment Group.

Regulators say they plan on more rigorous, more forward-looking versions of the computer simulations that the banks themselves have conducted to project how their capital would hold up through a variety of worst-case scenarios. While the banks’ own tests often focused narrowly on issues such as interest rates, inspectors will consider two other prospects. First, they’ll see what would happen to loan defaults and bank revenues if GDP falls by 2% this year and grows 2.1% in 2010, which is the consensus forecast. Then they’ll look at what would happen should things get dire: if GDP falls 3.3% in 2009, say, and remains flat after that. The feds are projecting home prices will slide 14% this year, and will look at the impact of unemployment at 8% or even 10%. Regulators may also be more skeptical than the banks about the impact of a prolonged recession on the values of mortgage-backed securities, derivatives, and other assets.

But it looks like flunking out is not in the cards. Speaking before Congress on Feb. 24, Fed Chairman Ben Bernanke said “the outcome of the stress test is not going to be pass or fail.” A senior Administration official adds, “There is no explicit cap on the amount of capital we will provide.” Investors are worried. “It’s like a test you get to do again if you didn’t do well,” says Donald J. Rismiller, chief economist of institutional broker Strategas Research Partners. Adds Petrou of Federal Financial Analytics: “The fear is that the tests will simply set the price tag for how much more taxpayers have to put in.”

If you are a regular reader then you know what I am going to say on this point……The Treasury is trying to create liquidity……but what good will that do when there is no demand?

Do you realize that with all the cash that we are pumping into banks……if it had been given to Main Street and mortgages had been paid off……This whole recession thing would not been hurting as badly as it is know…..Washington is still chasing the Wall Street biggies for the hand game…..Main Street keeps getting deeper and deeper into a hole of the government’s making.