2nd UPDATE: Treasury: 10 Of 19 Bks Need To Raise $75 Billion In Capital
May 07 2009 - 6:57PM
Dow Jones News
Ten of the 19 largest U.S. financial institutions will be
required to raise a combined $75 billion in capital, as the U.S.
government for the first time divided healthy banks from those
which may need help to weather a worsening economy.
U.S. officials stressed that the move to bolster capital needs
to occur across the banking industry, not just at the 19 largest
firms. Treasury Secretary Timothy Geithner said the department will
reopen existing programs to make capital available to banks of all
sizes, suggesting the U.S. government's intervention in the
financial markets could go on longer than expected. "It's very
important that the rest of the system has the access to capital,"
Geithner said.
He added later: "When you have the opportunity to raise capital,
you should raise capital."
Appearing alongside Federal Reserve Chairman Ben Bernanke and
Comptroller of the Currency John Dugan, Geithner said indications
from banks was that they are "reasonably confident" they can raise
the needed capital.
Bernanke said the results show that the quality, more than the
quantity, of capital at the banks is what needs to be improved.
"The results released today should provide considerable comfort
to investors and the public," Bernanke said, saying definitively
that the tests were "not tests of solvency."
Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo
& Co. (WFC), GMAC LLC and Morgan Stanley (MS) were told they
need to raise capital due to the results of the government's stress
tests. Regions Financial Corp. (RF), Fifth Third Bancorp (FITB),
KeyCorp (KEY), PNC Financial Services Group Inc. (PNC) and SunTrust
Banks (STI) also were told to bolster their reserves.
By contrast, JPMorgan Chase & Co. (JPM), Goldman Sachs Group
Inc. (GS), American Express Co. (AXP), BB&T Corp. (BBT), State
Street Corp. (STT), MetLife Inc. (MET), Bank of New York Mellon
Corp. (BK), US Bancorp (USB) and Capital One Financial Corp. (COF)
don't need to raise additional capital.
Bank of America must raise nearly $34 billion in capital, more
than any of its peers. All 10 banks will need to raise Tier 1
common capital to bolster their reserves.
Wells Fargo and Morgan Stanley moved quickly to address the
government-identified shortfalls, announcing they will sell
billions of dollars in stock. Wells Fargo said it will offer $6
billion in stock, while Morgan Stanley said it intends to sell $2
billion. Additionally, Morgan Stanley said it would also sell $3
billion of senior notes not guaranteed by the Federal Deposit
Insurance Corp.
The directives come after the government's weeks-long exercise
testing how the 19 banks would fare under darker economic
scenarios.
Bernanke said the tests don't represent a new capital standard
for all U.S. banks, stressing that it was a one-time event and that
there are no plans to extend the tests to smaller institutions.
Banks have enough Tier 1 capital, but need to improve the quality
of what they are currently holding.
"What we found out is that the quality needed to be improved,"
Bernanke said. "It's that improvement of quality that seems to be
the weakness of the capital structure right now."
Analysts were divided on the importance of the results' release.
Sung Won Sohn, a professor at the California State University
Channel Islands, said a "sigh of relief" was the best way to
summarize the situation.
"Assuming the economy continues to recover, there is a
possibility some of the banks could be overcapitalized," he
said.
Lawrence White, who teaches micro-economics at the Stern School
of Business, said the tests do not provide a true snapshot of the
banking industry.
"I have a feeling when this set of announcements is behind us we
are not going to hear from the stress test again," White said.
Geithner said the Treasury Department currently has enough money
left over from the original $700 billion to help the 19 banks
achieve the capital buffers required by the government. He declined
to say whether reopening capital assistance programs to all banks
would require the administration to return to Congress to request
additional funds.
The Treasury painted a grim picture of the toll of the financial
crisis on the banking system. It said total losses at the 19 banks
due to the crisis that began in mid-2007 could reach $950
billion.
Meanwhile, losses in 2009 and 2010 at the 19 banks could total
$600 billion under the government's scenario of a deepening
economic downturn. Mortgage loans and consumers loans could account
for 70% of the potential losses.
Geithner said people were free to judge whether the government
was conservative in deciding the banks' capital needs.
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com