WASHINGTON, Feb. 25, 2009
Big Banks Brace For Crucial "Stress Tests"
Obama Administration Hoping To Restore Public Confidence In Financial Sector
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Play CBS Video Video Bank Stress Test Hits D.C. Some call the bank bailout "nationalization" as a new poll suggests most Americans believe they will not personally benefit from the Obama plan, reports Bill Plante.
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Video Bank Stress Test Breakdown The nation's largest banks will face a stress test to determine whether or not they could withstand even greater economic setbacks. As Wyatt Andrews reports, more bailout money may be in store.
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Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington, Wednesday, Feb. 25, 2009, before the House Financial Services Committee (AP Photo/Lawrence Jackson)
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Interactive Eye On The Economy In-depth features on U.S. markets, taxes, employment and the Federal Reserve.
Banks that need new funds will be given six months to obtain it from the private sector or, failing that, from the federal government's $700 billion bank rescue program, the Treasury Department said Wednesday.
Treasury officials said the new support will be provided through the government's purchase of preferred shares of the bank stock that are convertible into common shares at a 10 percent discount to their price before Feb. 9.
The preferred shares will carry a 9 percent dividend and be convertible at the bank's option, but subject to regulatory approval.
The option to convert the preferred shares into common shares is a change in the rescue program designed to give the government greater flexibility in managing its assistance.
Common shares absorb losses before preferred shares do, which means that under a stock-conversion plan taxpayers would be on the hook if banks keep writing down billions of dollars' worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.
However, common stock in banks is incredibly cheap, and taxpayers would reap gains if the banks come back to health and the stock price rises.
The Treasury Department also provided details of how a new stress test will function to ensure banks have enough capital to survive a downturn that would be even more severe than the current recession. The tests will be conducted by bank regulators, including the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision.
Government officials hope the tests will boost market confidence in the banks by making it clear the institutions either have the necessary capital to weather a major downturn, or will obtain it from private investors or the government.
The results will help regulators decide whether banks may need additional assistance so they can carry out the critical mission of boosting lending to customers, a key ingredient to the economic turnaround.
Bank regulators said they wouldn't release the tests' results, but the banks will likely make some disclosure of the outcome, particularly if it shows they don't need more capital. Banks that seek private capital likely will indicate how much they need and the government will announce any new investments.
Administration officials did not say whether they expect to request more taxpayer money to fund the next round of investments in banks, beyond general statements that they would provide the capital that banks need.
But in his speech to Congress Tuesday evening, President Barack Obama said more money beyond the $700 billion committed last year would be needed. Saying he understands bank bailouts are unpopular, he insisted it was the only way to get credit moving again to households and businesses.
Mr. Obama also is urging key members of Congress to write tough new financial industry regulations to prevent crises and protect consumers.
The president called for new accountability, transparency and trust in the financial markets. Among his main principles for the legislation, he said, is that government better monitor the scale and scope of risks that institutions take.
Mr. Obama made his remarks Wednesday after meeting with the top Democrats and Republicans from the two House and Senate committees that will take the lead in writing the legislation. Central to the new regulatory effort are the unregulated esoteric financial instruments that have been blamed for Wall Street's free fall last year.
Meanwhile, Fed Chairman Ben Bernanke on Wednesday again spurned speculation that the government may nationalize
During an appearance before the House Financial Services Committee, Bernanke said nationalization "is when the government seizes the bank and zeros out the shareholders and begins to manage and run the bank. And, we don't plan anything like that."
But the Fed chief said it is possible the government could end up with a much bigger ownership stake in Citigroup or other banks. In the case of Citigroup, Bernanke said "we'll see how their test works out and what evolves."
Citigroup has been involved in talks with regulators over ways the government could help strengthen the bank, including use of the stock conversion plan. New York-based Citigroup already has received $45 billion in bailout money, plus guarantees to cover losses on hundreds of billions of dollars in risky investments.
The new stress tests will use two economic scenarios to gauge banks' health and are expected to be completed by the end of April.
The "baseline" scenario envisions the nation's gross domestic product, which is the value of all goods and services produced within the U.S. and the broadest barometer of the country's economic health, falling 2 percent this year, unemployment rising to 8.4 percent and home prices dropping 14 percent.
The "adverse" scenario assumes GDP will drop 3.3 percent, unemployment rising to 8.9 percent and home prices falling 22 percent this year.
For all of 2008, GDP rose 1.3 percent, which was the smallest increase since 2001. In the fourth quarter, GDP fell 3.8 percent, the biggest contraction since 1982.
The unemployment rate last month surged to 7.6 percent, the highest in more than 16 years. It was 5.8 percent last year, the highest since 2003.
Median home prices in the U.S. fell 9.5 percent last year, according to the National Association of Realtors, though many big cities like Los Angeles, Las Vegas and Miami showed far larger declines.
© MMIX, CBS Interactive Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.
Add a Comment See all 30 Comments
- And all the while.....Bank of America is taking bailout funds.......does this KEN LEWIS, CEO....have no conscience whatsoever.
He was so arrogant and self defensive....face beat red....as he faced Congress last week.
Bank of America can not continue to get bailed out by the taxpayers all the while Bank of America is trying to figure out how many ways to SCREW their customers. - Reply to this comment
- I hope you all decide to help me an bombard your congress and senators with phone calls.
I really could use my money back.
Thank you! - Reply to this comment
- I would think in this day age of technology that the Banks would be able to post the transactions according to ACTUAL date and time the transaction took place.
But if they can not ....the least they can do is post the smallest amount first....and then would not have gotten all those NSF fees...
and the POINT IS....on all those transactions....at the time I did them....there was money in the account to cover them.. It was only because Bank of America has the computer set up to CONVENIENTLY post the highest amount first for the transactions that took place on the weekend and Monday. They posted all the transactions on Monday...which is fine...but at LEAST they could have posted my transactions from the weekend first...so they would have cleared...then bounced my 64.00 actual overdraft.
Bank of America...and Ken Lewis' policy of creative ways to steal from their clients...has got to STOP!!!!!
IT IS STEALING....NO DIFFERENT THAN ROBBERY ON THE STREETS. - Reply to this comment
- BEWARE ALL AMERICANS....and everyone needs to call their Congressman and Senators and let them know that Bank of America is using CREATIVE ACCOUNTING to STEAL their customers money!
It just happened to me.
First....FYI any Bank of America card with a Visa logo is automatically insured for 300.00.
Did you know that?
So....if you go to the grocery store...and even though your account is only say 5.00 and you charge 10.00 it will approve the transaction. It will let you overdraft your account up until 300.00 before it no longer will approve the transaction. It used to be that if there was no money in your account it would not approve the transaction.
Here is what they do with the debit card charges....they automatically post the HIGHEST debit amount first so they can conveniently bounce the smaller debit amounts first if there is an overdraft involved.
Lets say you have 11 transactions which took place over the weekend...and at the time of making those transactions you had enough money in your account to make those transactions. However, then come Monday, at noon, you actually make a debit card purchase of 64.00 and overdraft your account by that amount. Well, okay, you would think you would get only one (1) NSF fee right? WRONG.....BOA will take all the weekend transactions and post those last. They posted the transaction I did on Monday first.....which was AFTER my weekend transactions....and then posted my weekeend transactions. So....instead of getting only 1 NSF fee they were able to get 11 as then...since they conveniently chose to post the highest amount first....all my weekend transactions bounced after that.
They just got sued and lost by the state of NEVADA and LOST. Now, only in the state of Nevada do they post the smallest amount first...since they lost in court.
However, they refused to waive the INVALID NSF fees on my account and told me they would continue the practice until each individual state SUES them.
I do not put my money in a bank only to have that bank think of creative accounting in order to steal from me. It is out and out stealing. They charged my account..and I am on unemployment by the way......more than 350.00 in INVALID NSF fees. I was in fact charged NSF fees on 11 items which there in fact was money in my account for.
Please help me all of you by calling congress and the senate and telling them to have BOA stop this practice....and to give me BACK the 350.00 they stole just stole from this UNEMPLOYED person. - Reply to this comment
- shurch4truth - it was not the Republicans, but the Clinton administration who started this whole mess. Get your facts straight. Why should we let Bill Clinton off so easy?
- Reply to this comment
- Put the fat cat bankers in jail and throw away the key. They twisted the intent of the laws to package low life mortgages for ill gotten gain. They are the true terrorists. They destroyed our once great nation. Its impossible to gain confidence and trust toward market manipulation, corporate greed, and unfair free trade. Hang them all. Republicans, bush, and cheney included. Prosecute them for deriliction of duty to say the least.
- Reply to this comment
- even in the book "F.I.A.S.C.O" has no such things like this..
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- Once the mortgages are rewritten to not default, they MAKE money toward the trust.
Unless, you can convince private industry to undergo this step, I don't see another fix that works. - Reply to this comment
- (3) The impetus for this is because the banking boards have done nearly nothing to fix defaulting loans voluntarily. If they uncover enough of the cancer, ithurts their shareholders, so they choose to ride it out without improving transparency or dissolving CDS's or rewriting impossible loans. Only an entity for the public good can fix that.
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- The funny thing is that the "fix" offered by Giethner/Obama is not so different from the one by Bush/Paulson. Just a few more requirements and strings.
Here are the money use choices that stretch the spectrum for investing monvey tos **** up banks:
(1) Just give themthemoney - buy shares less than 50%, but don't vote the shares [That didn't work- Paulson] Geitner is slightly different with some strings attached to injections.
(2) Do nothing and let the banks and ALL bad loans default/fail (and the economy REALLY tanks)
(3) Buy the troubled assets from thebanks and bring into a "trust": to manage. DO NOT sell back to bank interests (a type of nationalization).
(4) Buy more than 50% in investment ( a different type of nationalization) and DO vote for the public good.
(5) Take over the entity outright without share holder compensation (Chavez style Nationalization)
When you consider the spectrum, the Obama solution is NOT that radical. - Reply to this comment
- Remember, the Republicans spent 8 years getting US into the this mess.
If anyone tells you anyting difference they are trying to roll you.
Don't let them roll you. - Reply to this comment
- I
t's important to remember what that great American said, not too long ago:
"The Republicans got us into this mess and don't you forget that!"
Said by a great American - Reply to this comment
- You mean they're not just going to hand the money out without checking the accounting methods of the banks themselves? You mean they are not just going to trust the always trustworthy bank CEOs to do what is right without any oversight. What about the Bush-GOP precedent? Give the money to the banks so they can buy new airplanes or redo their offices or give huge bonuses while they lay employees off. After all, they are Wall Streeters and CEOs. They can always be trusted to use our money wisely, and to care about the little people more than they care for their own greed.
Oh, I forgot. That didn't work, did it?
Posted by jab232
Yes except you forgot to add the democrats in to the equation. Why is it you always forget to add that important detail - Reply to this comment
- as far as Real Americans see this problem OBAMA just caved in to the banks
and big business ...very bad advice ....the banks are not poor !! if they were they would not be spending $23 million or more on vacations and bouncs ; and airplanes.......Some of the same people who are getting this money are guilty of finicial crimes and should be in jail;@ - Reply to this comment
- You mean they're not just going to hand the money out without checking the accounting methods of the banks themselves? You mean they are not just going to trust the always trustworthy bank CEOs to do what is right without any oversight. What about the Bush-GOP precedent? Give the money to the banks so they can buy new airplanes or redo their offices or give huge bonuses while they lay employees off. After all, they are Wall Streeters and CEOs. They can always be trusted to use our money wisely, and to care about the little people more than they care for their own greed.
Oh, I forgot. That didn't work, did it? - Reply to this comment
- -----"Meanwhile, Fed Chairman Ben Bernanke on Wednesday again spurned speculation that the government may nationalize Citigroup Inc. or other large financial institutions."-----
The stock's already so low, is there ever a point where Wall St. would start to think that nationalization would be a net positive to the market rather than a negative? Is that the thinking or is it like the perceived blow to capitalism that they are responding to?
Like is it sort of like there's money to be made or lost perspective on Wall St. or do they sort of take the holistic view of sensing what actions would mean to their sense of the free market or something like that?
Or are the two perspectives sort of at war? Is one side overrepresented? Are they more McCain (anti-nationalization on an ideological level) than Obama (pragmatic cost minimization)?
Or something else? - Reply to this comment
- Posted by cbsblogger at 10:13 AM : Feb 25, 2009
I must start by saying I am not an economist but I am an American. I listened very carefully to our President last night and I must admit I was very impressed. I'm also impressed with his willingness to listen to any idea's out there but I must agree with him on one point. The People of this nation Elected him to clean up this terrible crisis and they were very clear that they did not want any more Supply Side Economics involved. Some do not want to give the Man a chance and are attacking him left and right, even though he's been in office a little more than a month. There to, I must say I admire him. He is cool and doesn't allow any of that to effect his vision and goals. Honestly I think we have a really good President here and that is exactly what we need. Now he did not create this crisis but he was very plain during the champaign that he intended to lead this nation away from the policies of George W. Bush. If you can't be enough of an American to at least allow him to get it all in place before you attack him then, in my way of thinking, you aren't much of an American. - Reply to this comment
- Hahah....except where HE's concerned or until he gets called to the carpet for waste...which is what makes it so funny. No pork in the stimulous he declares...it's loaded. Time to knotch the belt...do without if you can't pay for it...blah blah blah...as he trots back and forth to Chicago on AF 1 with his family in tow...to do what...HAVE FUN!! But he's making Geithner the Head of No Fun Under The Sun If You Took Money From Me Department....meaning...any business partaking in bail out funds must submit.. in writing... 30 days in advance.. approval to have any kind of event celebrating anything.....from the tax cheat...permission to have fun. freakin hilarious!!!
You have to admit...the irony...the hypocrisy...the unintended slips of reality...the 'transparency' that is too thick for light to penetrate... are just as revealing of this Administration as all the hoopla that the last Administration created. Picking sides is getting harder and harder to do every day.
Posted by poeticaintit at 12:07 PM : Feb 25, 2009
I guess you think you made a point... I just can't see it. - Reply to this comment
- We now have a President ready to do the tough things to get this country back on track. There was an eight year period of unharnessed greed which included no-bid contracts costing us billions upon billions of dollars in Iraq. It's called "cutting out the waste". There's plenty of it or haven't you noticed? Posted by mkm99
Hahah....except where HE's concerned or until he gets called to the carpet for waste...which is what makes it so funny. No pork in the stimulous he declares...it's loaded. Time to knotch the belt...do without if you can't pay for it...blah blah blah...as he trots back and forth to Chicago on AF 1 with his family in tow...to do what...HAVE FUN!! But he's making Geithner the Head of No Fun Under The Sun If You Took Money From Me Department....meaning...any business partaking in bail out funds must submit.. in writing... 30 days in advance.. approval to have any kind of event celebrating anything.....from the tax cheat...permission to have fun. freakin hilarious!!!
You have to admit...the irony...the hypocrisy...the unintended slips of reality...the 'transparency' that is too thick for light to penetrate... are just as revealing of this Administration as all the hoopla that the last Administration created. Picking sides is getting harder and harder to do every day. - Reply to this comment
- Must be a naive implementation, much of the accounting and transfers are electronic are they not?
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