“The administration,” writes David Leonhardt on the front page of yesterday’s New York Times, “seems prepared to argue that, while a few banks may need additional money, the broad financial system is healthier than many investors fear.”

The good news for the banks and their creditors, reports Leonhardt, is that “regulators” are slated to publish “an analysis… akin to a sprawling research report written by a Wall Street analyst but one that comes with the government’s imprimatur.” This report – the much anticipated “stress test” – will summarize bank balance sheets for investors so “that they can decide which banks to invest in.”

“Stress-tests” of America’s 19 largest banks have been in the works since at least mid-March. Back then, Citigroup shares were trading in the $1-2 range on a continuous flow of new write-down announcements, Bank of America stock was moving in the $3-5 dollar range as the market guessed at the net losses to BCA’s capital from the Merrill merger, and even venerable Wells Fargo Corp. and J.P. Morgan Chase were trading at decade lows of $8 and $15 respectively.

Amid the doom and gloom, the punditocracy inveighed for the Treasury Department to “stress test” America’s banks and then “nationalize” the weaker ones. Indicative of the mood at the time, Nouriel Roubini advocated breaking up C and BCA into “bad banks” consisting of illiquid securities and non-performing loans, and “good banks” consisting of performing assets, wiping out shareholders and bondholders of both in the process.

President Obama explained why he did not like the nationalization plan in his mid-April address at Georgetown University: “Preemptive government takeovers are likely to end up costing taxpayers even more in the end, and (are) more likely to undermine than create confidence… we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy,” the President said.

Instead of sending jitters through the market by leaving the specter of a costly bank-destroying “nationalization” looming, the Obama administration decided to nationalize the banks on the banks’ own terms. The administration announced three key measures that essentially guarantee that America’s large banks will survive:

1) The PPPIP which essentially gives $100 Billion of TARP funds plus free 8:1 leverage to government-approved buyers of what are delicately called “legacy assets” (i.e. “toxic” assets);

2) The easing of the terms attached to the CAP plan to recapitalize America’s banks;

3) The “loosening” of mark-to-market accounting rules for “illiquid assets.”

Between the three, the government now has an even larger and more direct stake in America’s banks, has additional leeway to mark up the value of the banks’ balance sheets, and has implicitly promised both to pour in new cash and buy up bad assets should the banks’ situations deteriorate further.

The plan seems like it will keep U.S. banks afloat, but the principal-agent problem is rearing its head writ large here. Who sets the rules for the financial system recapitalization? The executive branch of the U.S. government. Who is the largest shareholder in the weakest major U.S. banks? The executive branch of the U.S. government. Something tells me that the meek among the banks will inherit if not the earth, at least enough capital to continue zombie-ing around. Bank stocks are about to become an Evil Dead movie.

Of course, one might argue that the government is providing an important public service by recapitalizing the banks, thus resolving a dire “tragedy of the commons.” Saving the financial system does more good than harm, but the disorganized beneficiaries of that system cannot pull themselves together and save the system themselves — so the argument goes. Again quoting President Obama at Georgetown: “Although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of to banks… The truth is that a dollar of capital in a bank can actually result in eight or 10 dollars of loans to families and businesses. So that’s a multiplier effect that can ultimately lead to a faster pace of economic growth. That’s why we have to fix the banks.”

This is what Machiavelli called an effectual truth. As that parodically Machiavellian President Obama also said, bailing out the banks may not “make sense morally” (the bankers behaved badly yet they are going unpunished), and it may not even “make sense intuitively” (these particular banks failed at investing last time, but they’re getting a second chance anyways); and yet, if social science and history are any guide, the recapitalization will probably work in the long run. Recapitalizing the banks assures that the quantity of money will remain high enough for the economy to sputter on. Limiting bank failures and thus preventing mass bank withdrawals keeps the velocity of money from plummeting to 1930 levels.

Is the Obama bank put likely to cause lending to recommence in the short run? Probably not. Does it cost a bundle? “You betcha.” Whatever its relative demerits, however, this much can be said for the Obama plan: it allows America’s banks to survive and eke out a living while rebuilding their tier I capital.

Where’s the stress in the test then? If you bought Citi preferred anytime between the Alwaleed ibn Talal afternoon at the races and April 1^st, you can chillax. Stress free. And that goes for the biggest buyers too: Mssrs. Geithner and Bernanke.