U.S. banks race to fill

REUTERS
May 07, 2009
By Karey Wutkowski and David Lawder
WASHINGTON (Reuters) - U.S. regulators told top banks on Thursday to raise $74.6 billion to build a capital cushion officials hope will restore faith in financial firms and set a course out of the deepest recession in decades.
Moments after results of the bank "stress tests" were released, several of the firms found to be in need of more capital immediately issued statements detailing how they planned to meet the requirements.
"We're going to be watching carefully to make sure they give us credible plans for raising capital and becoming privately owned again," Federal Reserve Chairman Ben Bernanke said at a news briefing.
The examinations -- which involved more than 150 regulatory officials poring over the books of the 19 largest firms -- effectively drew a line between healthy and weak, and quantified exactly how much those institutions struggling under the weight of souring loans must raise.
U.S. stock index futures edged higher after the test results calmed fears that the government would have to play an even bigger role on Wall Street. Many of the banks themselves are loath to take more government aid for fear of the scrutiny it may bring and tough conditions on executive compensation.
"The fears of nationalization or of failure have more or less disappeared, and now what we're getting is details of how banks are going to fill in their capital deficiencies," said Eric Kuby, chief investment officer at North Star Investment Management in Chicago.
The bank reviews, led by the Federal Reserve, showed 10 banks needed additional capital to withstand heavier losses that would likely come if the recession worsened. Bank of America Inc had the largest need at $33.9 billion. However, it said it did not need any more government money.
Wells Fargo was found to need $13.7 billion, auto and home loan finance company GMAC $11.5 billion, and Citigroup Inc $5.5 billion.
U.S. President Barack Obama's administration hopes the firms can fill the capital holes from private sources, although Bernanke said the government "stands ready to provide whatever additional capital may be necessary to ensure that our banking system is able to navigate a challenging economic downturn."
Obama's team appears to have managed financial market expectations well, getting the worst news from the stress tests out two days ago -- that Bank of America needed about $34 billion.
EXIT STRATEGY
Several of the banks found to be in need of bigger buffers rushed to explain how they intend to raise the capital. Citigroup said it was seeking to exchange $5.5 billion in additional preferred securities for common stock to fill its shortfall.
"The surprise is not the size of the shortfalls, but the fact that the banks are immediately out there in the market trying to raise capital to cover the losses," said Andrew Busch at BMO Capital in Chicago. "And they may be right. After this rally, this could be the best moment to do it."
The banks that have been told to build their capital cushion have until June 8 to develop a detailed plan and November 9 to implement it.
The $74.6 billion amount was smaller than some analysts had estimated before the tests were finalized. Regulators had to walk a fine line as they sought to convince skeptical investors the reviews were sufficiently rigorous without unduly straining banks that were already in a precarious financial position.
The total figure also appeared to be small enough to ensure that the White House would not have to approach Congress for more rescue money on top of the $700 billion approved last year -- a request that would likely be turned down because of voter outrage over the bailouts.
The tests found that total credit losses for the 19 banks may reach $600 billion in 2009 and 2010. All told, if the economy performs as badly as the worst case scenario used in the stress test, the 19 banks' losses would mount to $950 billion from mid-2007 through 2010.
Skeptics of the administration's bank strategy still abound.
The American Bankers Association criticized the severity of the stress tests and said there was no evidence banks need to change the make-up of their capital. But it said the test results should end "harmful speculation."
Banks may cover any capital shortfalls through a mixture of asset sales, share sales, and perhaps the conversion of preferred shares into common stock. Regulators have put special emphasis on holding common capital rather than preferred because it can be tapped more quickly if needed.
If a bank raises common equity by converting preferred shares issued under the $700 billion bailout fund, the government could become one of the bank's biggest shareholders.
(Additional reporting by Christian Plumb, Elinor Comlay, Jonathan Stempel, Paritosh Bansal, Ellis Mnyandu, Dan Wilchins, Ryan Vlastelica and Jennifer Ablan in New York, and Mark Felsenthal, Glenn Somerville, Emily Kaiser and Jeff Mason in Washington; writing by Emily Kaiser; editing by Tim Ahmann)
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