Fed’s Bank Test Results ‘Reassuring,’ Show No Insolvency Risk

Fed’s Bank Test Results ‘Reassuring,’ Show No Insolvency Risk


May 7 (Bloomberg) -- Federal regulators today unveil what Treasury Secretary Timothy Geithner said will be a “reassuring” picture of a U.S. banking system able to withstand whatever stresses the recession may inflict on it once a handful of institutions add to their capital base.

Federal Reserve stress tests on the 19 biggest lenders show Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. together require about $54 billion, said people familiar with the conclusions. At the same time, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of New York Mellon Corp. have enough capital to help prop up flows of credit to businesses and consumers grappling with the worst recession in five decades.

“There is very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward,” Geithner said yesterday in an interview with PBS television’s Charlie Rose program.

Bank stocks surged yesterday in anticipation that firms won’t need as much capital as once projected; the Standard & Poor’s 500 Financials Index rallied 8 percent. Officials favor filling the shortfall by converting preferred shares into common stock, enabling the Obama administration to keep aside most of the $110 billion left in the Troubled Asset Relief Program.

Geithner Bernanke

Geithner, Fed Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila Bair and Comptroller of the Currency John Dugan are scheduled to brief reporters in Washington before the 5 p.m. release of the results.

The results are the culmination of weeks of investigations into the banks’ lending practices, funding strategies and securities and loan portfolios. Regulators said yesterday that banks that have to bolster their capital will have until June 8 to develop a plan and until Nov. 9 to implement it.

Officials put an emphasis in their reviews on tangible common equity, requiring the companies to have the equivalent of 4 percent of their assets after adjusting for risk. The financial yardstick strips out intangible assets, goodwill --the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the Treasury.

The reviews were designed to ensure the firms could sustain lending even if house prices, gross domestic product and the job market deteriorate more than most economists anticipate.

Stock Rally

The S&P 500 Financials Index yesterday reached its highest level in four months. The broader S&P 500 Stock Index closed up 1.7 percent at 919.53. Citigroup jumped 17 percent to $3.86, Wells Fargo advanced 15 percent to $26.84 and MetLife Inc. gained 17 percent to $32.35.

Before news of most of the banks’ results emerged, “there was some portion of the market that was buying into the doomsday stuff, that the banks are insolvent,” said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York. “There couldn’t be a wilder swing in sentiment between my client conversations in early March versus” yesterday, he said.

Bank of America has the biggest shortfall, at $34 billion, according to people familiar with the matter. Citigroup’s requirement is about $5 billion, after incorporating the bank’s previously announced plan to convert some of its preferred shares into common stock, people with knowledge of its results said.

Wells Fargo needs about $15 billion, while GMAC LLC’s gap is $11.5 billion, one person said.

No Needs

MetLife, American Express, BB&T Corp. and Capital One Financial Corp. were deemed not to need additional funds, according to the results.

Morgan Stanley may need between $1 billion and $2 billion, according to people familiar with the matter. Any capital requirement would result from Morgan Stanley’s plans to pay $2.7 billion to take control of Citigroup’s Smith Barney brokerage venture, one of the people said.

Spokespeople for all of the 12 banks declined to comment.

For firms judged to have additional capital needs, regulators have detailed options including conversions of preferred shares, asset sales and raising new funds from private investors.

Should the banks needing bigger capital buffers opt to convert the Treasury’s preferred shares, the government will have a bigger ownership stake. Officials may set limits on those companies’ dividends and political lobbying.

Management Changes

White House spokesman Robert Gibbs yesterday suggested that the Obama administration may seek management changes at some banks. Officials will want to “ensure that going forward they felt that the management was in place to remedy the situation and ensure long-term viability without continued government assistance,” he said.

Bank of America Chief Executive Officer Kenneth D. Lewis, 62, was ousted as chairman on April 29 after shareholders rebelled against management’s handling of the Merrill Lynch & Co. takeover.

Banks that want to return money injected by the Treasury since October must show they can borrow from private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.

JPMorgan, Goldman Sachs and Bank of New York Mellon have each sold debt without FDIC guarantees in the past month. Bank of New York Mellon said proceeds from its May 5 sale will be used to help repay the $3 billion capital injection it got from the $700 billion TARP last year.

‘Next Stage’

“Going forward, we just need banks to be able to issue debt without the FDIC backing -- that’s the next stage for these bank names in terms of evaluating their health,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York.

Institutions that need to raise their capital levels “need to look to nongovernment sources first, the FDIC’s Bair told lawmakers at a hearing yesterday in Washington. “The Treasury can be there as a backstop.”

The Treasury estimates about $110 billion remains to be distributed from the TARP. Geithner has said about $25 billion of the program’s funds are likely to be repaid in coming months. Lawmakers have warned that a political outcry against bailouts for Wall Street makes it impossible to count on authorizing an increase of TARP.

For many banks, the government’s stamp of approval may point to an exit from the TARP. The fund was initially aimed at boosting public confidence in banks by making the government a shareholder. Bernanke said May 5 it “helped us dodge what would have been a truly cataclysmic collapse of the global banking system.”

Lawmakers’ Ire

Congress later used the program to increase scrutiny of Wall Street, and passed legislation imposing executive pay limits. In February, lawmakers called eight bank chief executive officers to Washington to face criticism for outsized compensation and perks at a time when firms racked up losses.

JPMorgan Chief Executive Officer Jamie Dimon said April 16 that he could repay the New York-based firm’s $25 billion in taxpayer funds “tomorrow” and referred to the money as “a scarlet letter.” Repayment would free the company from compensation restrictions and other oversight.

MetLife, the largest U.S. life insurer, parted ways with its biggest rivals by not seeking funds from the TARP.

American Express Co., the biggest U.S. credit-card company by purchases, beat analysts’ profit estimates and said April 23 that it intends to repay the government’s rescue-fund investment.

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