Federal regulators finally confirmed Thursday (May 7) what has long been the subject of intense speculation and what was earlier leaked out by industry sources: some of the country’s biggest banks need more capital.
Bank of America, leads the pack, needing an additional $33.5 billion followed by Wells Fargo $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc. $5.5 billion and Morgan Stanley $1.8 billion. All in all, 10 banks among the 19 banks tested were told by the Federal Reserve to increase capitalization.
The big banks that were given a clean bill of health, i.e. were not required additional capital, include JP Morgan Chase, Goldman Sachs, MetLife, US Bancorp, and Bank of NY Mellon.
Despite the troubles that continue to plague some of the big banks however, government officials are confident that the stress tests findings reflect a financial industry that may not be totally out of the woods yet, but is getting there. Almost half of the institutions that have gone through the “financial exams” passed them, and those who did not, are in better shape than people thought they were. Fed Chairman Ben Bernanke said this report should restore investor confidence in the banking system.
The stress test results also revealed the particular trouble spots of each of the 19 banks where estimated losses would primarily stem from, in case of a continued economic recession.
For Chase, Citigroup, Capital One, American Express, and Morgan Stanley, credit cards are the biggest problem. For Bank of America, Wells Fargo, GMAC, and PNC Financial, mortgages (1st or 2nd) could prove to be their waterloo. The rest of the banks are struggling mainly with commercial real estate loans. Goldman Sachs is the only bank that was not identified with a single trouble spot although the firm would still have to cope with losses like all the rest in the face of an “adverse economic scenario.”
The Feds are giving the financial institutions that need more capital until June 8 to come up with a plan and have this proposal approved. What this means for the American taxpayers is that while the government has deemed these banks as “too big to fail” earlier, further capitalization need not come from government bailout money.
Already, the banks identified are unveiling plans to sell stock and convert preferred shares to come up with the $75 billion in combined additional capital needed. Wells Fargo intends to raise part of the $13.7 billion required from selling $6 billion worth of common stock to the public. Despite needing only $1.8 billion, Morgan Stanley is aiming for a $5-billion added capital, $2 billion of which will come from common stock.
Citigroup says it plans to transfer $45 billion of the bailout money from the government from preferred shares to common stock. This would give the US government a 36% share in the ownership of the company. On the other hand, Bank of America is not as eager to have the government have a larger stake in the bank and is instead, considering selling its shares in the China Construction Bank, China’s second largest bank.
The government is optimistic that with the stress test results finally out, banks can now focus on letting more credit flow to the consumers, further boosting economic recovery.
“With the clarity today’s announcement will bring, we hope banks are going to get back to the business of banking,” Treasury Secretary Timothy F. Geithner expressed in a news conference following the release of the results.