Stress Tests Find 10 Banks Need $75B More
The government's long-awaited "stress-test" results have found that 10 of the nation's 19 largest banks need a total of about $75 billion in new capital to withstand losses if the recession worsened.
The Federal Reserve's findings, released Thursday, show the financial system, like the overall economy, is healing but not yet healed. See the full report here. (PDF)
Some of the largest banks are stable, the tests found. But others need billions more in capital - a signal by regulators that the industry is vulnerable but viable. Government officials have said a stronger banking system is needed for an economic rebound.
Officials hope the tests will restore investors' confidence that not all banks are weak, and that even those that are can be strengthened. They have said none of the banks will be allowed to fail.
The banks that need more capital will have until June 8 to develop a plan and have it approved by their regulators.
Among the 10 banks that need to raise more capital, the tests said Bank of America Corp. needs by far the most: $33.9 billion. Wells Fargo & Co. requires $13.7 billion; GMAC LLC, the financing arm of General Motors needs $11.5 billion; Citigroup Inc. $5.5 billion and Morgan Stanley $1.8 billion.
The other five requiring capital are all regional banks: Regions Financial Corp. of Birmingham, Ala., needs to raise $2.5 billion; SunTrust Banks Inc. of Atlanta $2.2 billion; KeyCorp of Cleveland $1.8 billion; Fifth Third Bancorp of Cincinnati $1.1 billion; and PNC Financial Services Group Inc. of Pittsburgh $600 million.
Among those that do not require additional capital: American Express, J.P. Morgan Chase, U.S. Bancorp, Capital One, and Goldman Sachs.
The banks have until November to raise more capital, either by selling assets or issuing more common stock. Wells Fargo and Morgan Stanley immediately announced new stock offerings, reports CBS News business correspondent Anthony Mason. And analysts believe most won't need to go back to the government for help.
"I believe they can raise money today, yes," Paul Miller of FBR Capital Markets told Mason.
But Miller worries the government's test wasn't stressful enough. The severe scenario simulated unemployment hitting 10 percent; Miller believes that should have been 12 percent.
Still, "If it stays at 10 percent, the economy's much better than we thought," he said. "They won't have to come to the market and we will start digging ourselves out of this recession."
The tests found that if the recession were to worsen, losses at the 19 stress-tested firms during 2009 and 2010 could total $600 billion.
"Looking at the big picture, you can say that things aren't so bad for the financial industry as a whole," said Kevin Logan, chief U.S. economist at Dresdner Kleinwort.
Wall Street has regained confidence in the banks. Bank of America and Wells Fargo stock have rallied more than 300 percent since march. Citigroup has rebounded more than 200 percent, Mason reports.
Bank analyst Collyn Gilbert called today's developments a turning point.
"It's finally giving some clarity into the capital structures of the banks which has been what's dragging these banks into the ground for the last six to 12 months," Gilbert, of the firm Stifel Nicolaus and Co., told Mason.
But Logan said attracting fresh capital will be a challenge for banks that need it.
"The banking industry is not going to make a lot of money going forward, and that's a dilemma for keeping banks solvent and getting them lending," he said.
Soon after the results were announced, Stephen Friedman, chairman of the Federal Reserve Bank of New York's board of directors, resigned, effectively immediately.
Friedman was the subject of a recent Wall Street Journal story that raised questions about his ties to Goldman Sachs Group Inc.
Goldman Sachs was found to not need additional capital in the stress tests.
Late last year, the company received quick Fed approval to become a bank holding company. During that time, Friedman sat on Goldman's board and had a large holding in the company, a violation of Fed policy, the Journal reported.
But the New York Fed's executive vice president and general counsel Thomas Baxter says Friedman's purchases of Goldman Sachs stock in December 2008 and January 2009 "did not violate any Federal Reserve statute, rule or policy."
Financial stocks surged in after-hours trading, after the report was released at 5 p.m. Citigroup shares jumped 8.4 percent to $4.13, while State Street rose 7.3 percent to $40.60. Earlier, the markets had been down.
The government's unprecedented decision to publicly release bank exams has led some critics to question whether the findings are credible. Some said regulators seemed so intent on sustaining public confidence in the banks that the results would have to find the banks basically healthy, even if some need to raise more capital.
Jaidev Iyer, a former risk management chief at Citigroup, said regulators are playing to public expectations, which could put the government in the role of creating "winners and losers."
Because the government has said it won't let any firm fold, that could put taxpayers on the hook more than a confidential test would have, he said.
"If there is in fact no appetite to let losers fail, then the real losers are the market at large, the government and the taxpayers," Iyer said.
In the tests, the Fed put banks through two scenarios for what might happen to the economy.
One reflected forecasters' current expectations about the recession. It assumed unemployment will reach 8.8 percent in 2010 and house prices would decline by 14 percent this year.
The second scenario imagined a worse-than-expected downturn: Unemployment would hit 10.3 percent and house prices would drop 22 percent.
The steeper downturn would make it harder for consumers and businesses to repay loans, which would cause banks' assets to lose value. The government is forcing the banks to keep their capital reserves up so they can keep lending even if the economic picture darkens.
But some analysts questioned whether the tests were rigorous enough. Economic assumptions have changed since the test was designed in February. The U.S. jobless rate has risen to 8.5 percent and is projected to go higher this year.
"The assumptions the government has used are likely not to be completely accurate," said Jason O'Donnell, a bank analyst with Boenning & Scattergood Inc.