Nineteen of the largest banks in the United States are being poked and prodded, and hooked up to fancy EKGs and beeping monitors…

The U.S. government is “stress testing” their balance sheets. Another tool in the new arsenal of federal regulations, and possibly another hurdle in receiving government aid. Here’s what’s happening.

Over the next two weeks, the Treasury and the Office of the Comptroller of the Currency are reviewing the balance sheets of 19 banks, each with $100 billion or more in assets under management.

The government wants to determine if the banks have adequate capital to survive a prolonged adverse economic situation.

The results will not be ready until April 30, and the government is asking banks to keep the results under wraps until they are all complete. It’s earnings season, and any leaks could hit the market hard.

Investors and media will be clamoring for these results. They could be the clearest picture of the health of our financial system, and a good indicator of who’s next on the government aid list…

It’s nearly a given that some banks undergoing the stress tests will need large amounts of bailout cash.

But the results may be a bit misleading in the face of earnings. Or at least a bit confusing.

Earnings are predicted to be a bit rosy, but all of those numbers will be on a non-cash basis, says Joseph Mason, an associate professor at Louisiana State University in Baton Rouge, who previously worked at the Treasury’s Office of the Comptroller of the Currency.

Bloomberg reports, “Changes to fair-value, or mark-to-market accounting rules approved by FASB on April 2 allow firms to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities. The changes, which apply to first-quarter results, could boost capital balances by 20 percent and earnings by as much as 15 percent.”

That means earnings could look good, and a bank still might have inadequate cash according to stress test results.

So what does that mean? It could mean that a bank with decent earnings could get hit with an announcement that it will need to accept government aid.

In fact, bank regulators might try to force some “troubled” banks to sell some assets to a newly created public-private fund in order to receive capital injections. It’s part of a program called CAP, or Capital Assistance Program, and one of the goals is to help soak up the nearly $1 trillion in toxic assets still in the financial system.

It has some banks fidgeting, and trying some fancy maneuvers in order to get good results from this stress testing.

One of the things that has caught regulators’ eyes is hiking fees and interest rates.

“Since the Troubled Asset Relief Program was launched last October, banks bolstered by capital infusions have boosted charges on a wide range of routine transactions, hiked rates on credit cards and continued making loans criticized as predatory by consumer advocates,” writes The Wall Street Journal.

In fact, Bank of America (BAC:NYSE) announced it was doubling its credit card interest rates for some customers to 14%.

News like this has put a frown on the face of the Treasury Department and other regulatory bodies. But banks retort that this is a legitimate way to recoup their losses.

And yet, they’re raising this capital on the backs of the people that have funded billions upon billions of dollars’ worth of bailouts.

A different way of going about things could be found in the recent actions of Goldman Sachs (GS:NYSE).

“Goldman may announce a multibillion-dollar stock offering along with its first-quarter numbers,” reports Fortune, a CNNMoney affiliate. “A sale would be Goldman’s first capital raise since it got $10 billion from Treasury in October in the first round of Henry Paulson’s Troubled Asset Relief Program.”

Speculation insists the company will use this money to help repay its TARP loan (about $10 billion), thereby shielding itself from government regulations. The company itself is declining to comment on the prospects of raising new capital, though it could make an announcement after it releases its earnings.

Earnings are expected to be good, with earnings-per-share at $1.60, well above the originally forecasted $1.21.

Here’s the interesting thing, though.

More speculations abound on the idea that Goldman Sachs will use the raised capital to buy depressed assets.

Justice Litle, editorial director of Taipan Publishing Group, writes, “The very idea that these banks could be buying up each other’s garbage – that they are even considering it – well, it just hurts my head, it’s so mind boggling.”

He continues, “Tragedy is turning into farce as the real intent of the bank rescue plan becomes apparent. Geithner and the banksters have adopted the playbook of a true fraud-and-deceit all-star: Enron.”

All this does is leave the taxpayers and investors “in the clover,” says Justice, as all these plans are backed by government – i.e., taxpayer – money.

“Investors haven’t yet gotten their heads around the incredible measures taken so far to fight this global crisis. For example, the U.S. government and the Fed have already ‘spent, lent or committed $12.8 trillion,’ according to Bloomberg – roughly an entire year’s worth of U.S. economic output,” writes Justice.

“Against this backdrop, gold is the only alternative currency not subject to the whims of a printing press... and gold stocks are leveraged to the price of gold.”

Other Related Topics: Bank Bailout , Banks , Economic Growth , Recession , Sara Nunnally , Taipan Insider

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