The stress tests released by the Obama administration Thursday painted a broad montage of the troubles in the nation’s banking industry and, for the first time, drew a stark, official line through the new landscape of American finance.
On one side are institutions like JPMorgan Chase and Goldman Sachs, which regulators deemed stronger than their peers — perhaps strong enough to repay billions of bailout dollars and wriggle free of government control.
On the other side are weaker institutions, among them Bank of America, which now confront the daunting challenge of raising additional capital on their own or accepting increased government ownership, along with whatever strings might be attached. Time is short: the banks have only until June 8 to draw up their plans for regulators. As the results of the tests streamed in from the Federal Reserve late Thursday, banks began racing to raise newly required capital.
Broadly speaking, the test results suggested that the banking industry is in better shape than many had feared. Of the nation’s 19 largest banks, which sit atop two-thirds of all deposits, regulators gave nine a clean bill of health. The remaining 10 were ordered to raise a combined $75 billion in equity capital as a buffer against potential losses should the economy deteriorate. That amount is far less than even the most optimistic forecast.
But the tests left some crucial questions unanswered. Once the banks satisfy regulators, will they start making more of the loans that businesses and consumers need? And what happens if this recession turns out to be even worse than regulators’ worst-case assumptions — and the banks’ losses start ballooning again?
“Everybody should breathe a sigh of relief,” said Peter J. Solomon, who runs a boutique investment bank and early in his career worked at Lehman Brothers. “Now they question is, So what? Will they lend?”
The results shined an uncomfortable spotlight on the most troubled financial institutions: GMAC, the finance arm of General Motors; Bank of America; Wells Fargo; and Citigroup. Several large regional banks were also deemed to need large sums of capital.
Administration officials, as well as banking executives, hope the banks can plug many of the gaps by selling stock to the public or selling businesses. If that is not enough, the banks could ask the government to convert preferred shares purchased last autumn to common stock. Such a move would not involve giving banks additional taxpayer money, although it would represent a riskier deal for the government. It also raises the prospect that the government would become a substantial shareholder in several large banks.
Wells Fargo announced ambitious plans to raise capital in hopes of avoiding increased government ownership. Wells, which regulators determined needed $13.7 billion, said it would seek to sell $6 billion of stock. Morgan Stanley, which was ordered to raise $1.8 billion in common equity, said it would sell $2 billion in new shares.
Bank of America, which faces a gap of roughly $34 billion, said it would make a common stock offering on Friday and would offer an exchange for some of its preferred stock later this month. It said it expected to raise $17 billion this way and also planned to sell assets worth $10 billion. The bank said it would fulfill the rest of $34 billion needed through earnings in next few months.
Kenneth D. Lewis, the bank’s embattled chief executive, hailed the results of the stress test as a sign of his bank’s health.
“The bogey is large but we have significant opportunities,” he said in a conference call Thursday evening. “We do not need new government money, and we do not intend to convert the existing TARP money that we have. In fact our game plan is to get the government out of our bank as quickly as possible.”
Mr. Lewis noted that shareholders last week expressed concerns at the annual meeting and stripped him of his chairman’s title. “As you might imagine, it was a humbling experience,” he said.
“Frankly there’s been a lot of noise around our company,” Mr. Lewis said. “We hope these changes will help us quiet that noise.”
Citigroup, which for many has come to symbolize the problems plaguing the financial industry, was has already been moving quickly to address its problems. Regulators determined that the bank must raise $5.5 billion, on top of the converting $45 billion in bailout funds to common stock, which would give the government a 36 percent stake.
Vikram S. Pandit, the bank’s chief executive, said he would expand the company’s offer to exchange preferred shares of stock for common stock to a broader assortment of private investors. He also said he would speed up plans to sell businesses.
“The government’s stress test was a rigorous process that assessed our capital and confirms our view that Citi’s plans and actions will give it the financial strength to weather an adverse stress scenario,” Mr. Pandit said in a statement.
Citigroup has already accepted the government as a key owner. In February, it announced that it would convert just over half of the $45 billion it has received from the government into common stock, a step that will give taxpayers an ownership stake of 36 percent.
At the Regions Financial Corporation, the largest bank in Alabama, was ordered to increase its common equity by $2.5 billion. The bank is exposed to steep losses on construction loans. But Regions questioned regulators’ determination, saying it believed the projected losses were “unrealistically high.” Nonetheless, Regions said it would comply and that it was considering its options.
SunTrust Banks, a large lender in Georgia that has also been hurt by the construction bust, was told to raise $2.2 billion. In Ohio, Keycorp and Fifth Third Bancorp, both of which expanded into Florida at the height of the real estate bubble and must now raise additional capital to cover their projected losses, said they were evaluating their options.
But a handful of stronger banks are pulling away from their weaker peers and emerging as institutions that could dominate the industry.
Goldman Sachs, for instance, said Thursday that it hopes to return the $10 billion it received from the government as soon as possible, and regulators blessed Goldman’s capital position as it is. JPMorgan Chase, which was also deemed to have enough capital, is pushing to return bailout money as well.
For Washington and Wall Street, the overarching question is whether investors and depositors will take solace from these results. Banks and administration officials are eager to persuade private investors that the banks are stable enough to invest in. While some analysts question the rigor of the tests, Timothy F. Geithner, the Treasury secretary, has insisted the exams will foster confidence in the banks.
“The Fed is hoping the whole process will be explained to investors and there will be enough faith in the legitimacy of the whole stress tests that they’ll put to rest all of the speculation,” said Tanya Azarchs, the bank rating analyst at Standard & Poor’s. “The golden ring here, if you can catch it, is confidence.”
,
No comments:
Post a Comment