Huh?  Which is it?  If by "pass," regulators merely mean that a bank won't be instantly seized and its management defenestrated, then I guess this makes sense.  Awards for all!  On the other hand, the prospect of a bank getting a "needs improvement" grade and then successfully selling a big stock issue to raise private capital is just fanciful.  Even banks that pass with flying colors will have trouble doing that.

I've said a few times recently that my trust in Treasury rests squarely on what happens with these tests.  If major banks are being found insolvent (likely), then major fixes need to happen -- and they need to happen in the public eye, instead of behind closed doors.  Management needs to change; policies need to change; and something like the Chrysler/GM reorganize-before-you-get-our-money plan needs to go into effect.

On "Face the Nation" this weekend, Geithner said that when banks require "exceptional assistance," "we'll make sure that assistance comes with conditions, not just to protect the tax payer but to make sure this is the kind of restructuring necessary for them to emerge stronger. And where that requires a change of management of the board, we’ll do that."

Now, I had trouble listening, too, because of the crazy Frankenstein-esque white streak that's cropping up in Geithner's hair (over the right ear), but when I combine the stress test information, Drum's analysis, and what Geithner said to Bob Scheiffer while facing ye ol' nation, what I come up with is this: several big banks are going to need big money.  They're going to be told by Treasury to increase their capital levels.  That's going to leak, weakening their positions, and when the banks try to sell their assets, they'll be stymied by a dried up market.  Then Treasury and/or the Fed and/or the FDIC (which apparently has super-powers) will have to sink more money into the banks (or will have to sink money into supporting purchase of their assests) to make sure they have enough capital to survive the worst-case scenario of the stress tests, which, by some accounts, we passed on the way down a while back.

By the end of the month, heads will figuratively roll at several of the largest banks in the nation, and possibly on their boards.  I suspect this will start with BoA chief Ken Lewis, though whether that's got anything to do with the stress tests or not, well, I'm neither psychic nor Meredith Whitney, so I can't say.  (Actually, I suspect Lewis will step down before the test results are conclusively leaked, which might lead to a delicate problem for Treasury, the same problem it will face at AIG and Citi: the guys in charge will arguably not be the guys who got the company to where it is, but the symbolism of seeing them go -- of seeing anyone in a suit trying to hail a TownCar with his belongings in a box -- might be too needed for them to stay).  To some this will feel like de-facto nationalization.  Bring on the commie bear cupcakes!

The weirdest part of all of this is that, if all of that terrible stuff happens, it's exactly what the stress tests were designed to do.

Here is the problem I see, though, and I'm wondering if anyone has an answer: As the ever-reasonable Justin Fox at Time points out, the U.S. can't allow another major bank to fail -- we signed a pledge to that effect in October.  Forcing a bank to reorganize, to fire management, to restructure itself, to begin any kind of break-up, depends on their being disincentive for it not to do so.  If these banks know we're going to bail them out regardless -- why would they agree to compensation limits?  Why would they agree to change management at all?