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Notable quotes recently from three heavy hitters in the banking industry shed a lot of light on what ails banks these days, and what needs to happen for it to get fixed:

First, speaking at the Stanford Institute for Economic Policy Research on Friday, Wells Fargo (NYSE:WFC) Chairman Dick Kovacevich blasted the Treasury for forcing large banks to participate in the TARP capital plan whether they wanted to or not, and then changing the rules of the game after the fact:

Is this America--when you do what your government asks you to do and then retroactively you also have additional conditions? If we were not forced to take the TARP money, we would have been able to raise private capital at that time and not needed to cut the dividend.

Thus have the government’s ham-handed efforts with its TARP bailout actually scared private capital way from the banking system. I doubt that’s what the feds had in mind. Nor is Dick crazy about the government’s new, mandated stress tests for the big banks, either:

We do stress tests all the time on all of our portfolios. We share those stress tests with our regulators. It is absolutely asinine [emphasis added] that someone would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.

Well, yes it is asinine, isn’t it? If on-site regulators are already familiar with the results of banks’ stress tests and have not mandated any needed changes to bank practices as a result of them, what good is a one-size-fits-all stress test mandated from on high supposed to do?

Dick articulates issues more clearly—and tends to be more candid—than most of his fellow bankers. Given what happened to the banking business last year, I eagerly await Wells’s annual letter to shareholders, which should be out soon.

Next up is Bank of America (NYSE:BAC) CEO Ken Lewis, who’s suddenly been making more sense in the past two weeks than he has in the past 20 years! Here’s what Lewis had to say last week to the Boston College Chief Executive Club about the government’s stress test:

It’s possible that the government could compel us to take more capital pending the results of their stress test. But I’m confident we’ll pass the stress test.

Lewis is expressing a sentiment that’s surely shared by many of his peers these days. On the one hand, bankers are confident about the status of their loan portfolios—they know those loans better than anyone--but are nonetheless concerned that the Treasury will rig the stress-test game ahead of time, in order to arrive at an interesting predetermined outcome. Such contrived uncertainty is not helping the banking business regain its health. This is no way to regulate, nor build confidence in, our largest financial institutions.

Finally. There’s Treasury secretary Tim Geithner, who testified yet again before Congress last week:

Banks are living with a cloud of uncertainty, which is causing them to be defensive and withhold lending, and we need to arrest that basic dynamic.

Say, Secretary, what do you suppose has helped cause this “cloud of uncertainty” that has you so dismayed? Might it be the new stress test you are suddenly imposing on institutions that are already supervised closely (including via the use of stress tests) by your own on-site examiners? Could it be from Congressmen who suddenly feel that, since the Treasury is a preferred stockholder in certain banks, that they can start dictating banks’ compensation, marketing, and other operating expenses?

Secretary Geithner, please listen: You and others in the administration, as well as Congress, are taking actions and making remarks that undermine confidence in the very financial institutions you say you’re trying to help. If you want to reduce uncertainty in the banking business, step back, stop the meddling, and stop the grandstanding. And if you do nothing else, get this charade of a stress test over as soon as possible.

Source: Kovacevich, Lewis and Geithner Speak Out on the Banking Industry