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Big banks' 'stress test' results to be reassuring, Geithner says

The 19 banks are likely to be forced to add billions of dollars to their cushions of capital, but the Treasury secretary expects they will need little more in federal bailout funds.

May 07, 2009|Jim Puzzanghera and E. Scott Reckard

WASHINGTON AND LOS ANGELES — Today is judgment day for the country's biggest banks as the government releases results of "stress tests" to gauge their stability, but Wall Street celebrated a day early after concluding that there would be no bombshells about the financial industry.

As a group, the 19 banks are likely to be forced to add tens of billions of dollars to their front-line cushions of capital to guard against a deeper-than-expected recession. But that could be accomplished in a number of ways short of raising cash, and Treasury Secretary Timothy F. Geithner -- expressing confidence Wednesday that the banks would need little more in the way of federal bailout funds -- predicted the results would be "reassuring."

The stock market also expressed confidence Wednesday in a heartening outcome. Shares of banking companies shot up, leading the overall market higher. The Dow Jones industrial average climbed 101.63 points, or 1.2%.

"The tests have clearly been a market confidence builder," said Terry Moore, managing director of consulting firm Accenture's banking practice. "It helps us counter the sky-is-falling mentality we've seen."

Still, the results, to be released this afternoon, could trigger further dramatic changes in the U.S. banking system, including greater government control over the operation of some of the institutions that have received billions of dollars in taxpayer funds. The results also could increase pressures on some large regional banks to merge with others.

Instead of new government financing, the vast bulk of the big banks required to bolster their capital will do so by raising money from private sources, selling assets or simply exchanging one form of stock for another, Geithner said in an interview on "The Charlie Rose Show" on public television.

"I think the results will be, on balance, reassuring," the Treasury chief said. "None of those 19 banks are at risk for insolvency."

Although economists have expressed cautious optimism in recent weeks that the economy, if not yet recovering, isn't shrinking as much as it was, more than 150 bank examiners and other regulators spent about two months studying what would happen to the 19 biggest banking companies if the recession turns out worse than currently expected.

The 19 institutions include the most sorely wounded of the big banks, Citigroup Inc., which has received $50 billion in government bailout funds. The New York bank said in February that it would trade as much as $52.5 billion in preferred stock, which doesn't count as front-line capital, for common stock, which does.

Citigroup's proposed stock swap includes $20 billion in preferred stock acquired by the government. The company delayed the transaction until after the results of the stress test were announced. A person close to the bank said Wednesday that it expected to cover its capital shortfall without additional federal funds.

Charlotte, N.C.-based Bank of America Corp., which received $45 billion in bailout funds by selling preferred stock to the government, also was expected to address a nearly $34-billion shortfall in front-line capital by exchanging some of that preferred stock for another type of preferred shares that counts as common stock.

Other banks expected to be told to increase their common equity include Wells Fargo & Co. of San Francisco, the largest California-based bank, and several regional banks elsewhere in the country.

The government's Troubled Asset Relief Program, or TARP, infused capital into banks in exchange for preferred shares, which pay regular dividends but do not have voting rights. Converting that preferred stock into voting common stock would tend to increase federal officials' influence over the banks, which already have seen TARP used to limit what the banks can pay their executives as well as the dividends the companies can pay to common shareholders.

As a last option, the Obama administration will use TARP to funnel additional cash to banks that need to raise some but can't do it on their own -- part of a promise that none of the nation's biggest banks will be allowed to fail. Although the $700-billion TARP fund is down to $109 billion, Geithner has said the administration will not need to ask Congress for more.

Geithner, Federal Reserve Chairman Ben S. Bernanke and the heads of two other banking regulatory agencies issued a statement Wednesday reiterating their commitment to the banking system and noting that institutions that need to raise additional money would have until June 8 to develop a plan to raise it privately and until Nov. 9 to do so.

The government has emphasized that all 19 banks are already deemed to be well capitalized based on current economic conditions. For that reason, critics have called the stress tests unnecessary -- and perhaps harmful because the institutions determined to need more money could be stigmatized, making it harder to raise the funds.

"I hope we get past Friday and we'll never hear the words 'stress test' again," said Bert Ely, a banking consultant.

In addition to converting preferred shares to common, bank executives could raise their front-line capital -- expressed as a percentage of assets -- by selling businesses or other holdings or by raising money from private investors in exchange for new stock.

"That's the real stress in the stress test: Has the economy recovered enough and are the institutions strong enough to raise the capital from private investors?" said Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents large financial institutions.

The 19 largest banks, each with more than $100 billion in assets, have received a total of about $214 billion in bailout money so far.


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