Friday, May 8, 2009

2 Banks Cited in Stress Tests Find Ready Investors

Finally, it was a moment for thA day after the bank stress tests were released, two major institutions, Wells Fargo and Morgan Stanley, handily raised billions of dollars in the capital markets on Friday to satisfy new federal demands for more capital. A third, Bank of America, hastily laid out plans to sell billions of dollars in new stock.

The speed and ease with which the banks swung into action, combined with a surge in financial shares, was hailed as a sign that confidence was returning to the financial industry. The sales seemed to put to rest questions about whether big banks would be able to lure private investors, rather than have to turn to the government again.

While the results of the tests on 19 major banks, released by the administration on Thursday, were far more positive than many had expected, they nevertheless created an immediate urgency for 10 banks to raise new capital. Federal regulators ordered them to raise a combined $75 billion to buffer their potential losses.

With some off to such a rapid start — Goldman Sachs raised $5 billion before the stress test results were announced — the race is now on among the most robust to repay the government money they received last fall and so escape from government control.

But while the mood was generally buoyant among these leaders, others still have to spell out how exactly they will raise money — or accept further federal aid.

GMAC, the onetime finance arm of General Motors, was deemed by the regulators to need an extra $11.5 billion in capital. On Friday, Treasury Secretary Timothy F. Geithner indicated that this was likely to have to come from the government and that the administration would stand behind GMAC.

The stress tests estimated how much each bank would lose if the economic downturn proved even deeper than currently expected: under the worst-case assumptions, with an unemployment rate of 10.3 percent, the losses by the 19 banks could total $600 billion.

On Friday, economic data showed the American economy lost a further 539,000 jobs in April and the unemployment rate leapt to 8.9 percent — a sign that the United States might already be heading toward the worst case, although the job losses were less than Wall Street expected.

Despite the sobering outlook, the mood on Wall Street was generally upbeat after the rosier-than-expected assessment of the biggest banks. The stock market climbed, with the Standard & Poor’s 500-stock index gaining 2.4 percent on Friday.

“If there were holes in this, the market would have seen it,” said Stuart Plesser, an analyst at Standard & Poor’s.

In the capital-raising exercises, Wells Fargo sold $7.5 billion of common stock; regulators ruled it needed to fill a capital hole of $13.7 billion.

Morgan Stanley raised $8 billion by selling $4 billion in common stock and $4 billion in bonds. It increased the total amount it raised compared with its initial plans by $3 billion because of strong investor demand, it said. Regulators had declared that the investment bank needed to raise money to fill a $1.8 billion hole.

In an important signal of its future intentions, Morgan Stanley raised its debt without the guarantee of the Federal Deposit Insurance Corporation — a show of strength that is one of the government’s requirements for paying back money from the Troubled Asset Relief Program. JPMorgan Chase and Goldman Sachs, which are also eager to repay TARP funds, have recently gone through similar debt-raising exercises.

Bank of America, judged one of the weaker institutions, registered its intention to sell 1.25 billion common shares over the coming weeks. At Friday’s closing stock price, that amount of stock would be valued at nearly $18 billion, which means the bank might not have to turn to another possible means of raising money like converting preferred shares into common equity.

Citigroup, which for many has come to stand for the problems plaguing the financial industry, was told by regulators that it must raise $5.5 billion, in addition to its recent efforts to raise capital by selling businesses and converting to common stock just over half of the $45 billion of its preferred stock held by the government.

On Friday, Vikram S. Pandit, Citi’s chief executive, held a town hall meeting at Citigroup’s investment banking offices in New York, where he told staff members the test results had validated his strategy of righting the company.

But Meredith A. Whitney, a prominent banking analyst, said the results underscored the difficulties banks faced. Many are likely to experience several more quarters of poor financial results.

“The revenue environment is very different,” Ms. Whitney said. Given the recession, banks are not going to make much money from credit cards or originating mortgages, she said. And even if all the banks secured more capital, they still might not lend, holding back the economy.

Some analysts are now saying that some of the assumptions even in the worst-case situation may turn out to be too optimistic.

Given this, attention is now turning to the thousands of smaller banks elsewhere in the country and whether they will be able to survive any deterioration in economic conditions. Mr. Plesser said that these banks would face extra capital needs and that there might be consolidation among them.

“It’s not the same urgency as the big 19, but I think we are going to see needs for additional capital, and one way to get that is to be swallowed up,” he said.

e banks to de-stress

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