Stress Test Score: Banks Need $75B More
Government test results find that 10 of 19 big banks need more capital.
May 7, 2009— -- The government's results of stress tests for the nation's 19 biggest banks revealed a mixed picture of their economic solvency, with 10 of the 19 banks tested in need of a further injection of cash, totaling $74.6 billion.
That includes $33.9 billion for Bank of America, $13.7 billion for Wells Fargo, and $11.5 billion for GMAC. The government has already invested hundreds of billions of dollars in the nation's financial system.
"It was an extraordinarily demanding collaborative effort," said Treasury Secretary Timothy Geithner. "These banks are reasonably confident that they're going to be able to meet these capital needs from private sources."
Geithner said the government will extend the window that banks have to apply for the capital assistance program that Treasury established last fall.
The government has already invested hundreds of billions of dollars in the nation's financial system.
In the meantime, J.P. Morgan Chase & Co., Goldman Sachs Group Inc., MetLife Inc., American Express Co., Bank of New York Mellon Corp. and Capital One Financial Corp., will not have to raise extra cash. That decision essentially gives them a clean bill of health from the government. It's the first time the government has drawn a clear line between the healthy banks and those struggling.
Other financial institutions still in need of capital include Citigroup, which the government says needs $5 billion, and Morgan Stanley, which is in need of $1.5 billion, the test revealed.
"These were not tests of solvency," said Federal Reserve Chairman Ben Bernanke. "Roughly half the firms, though, need to enhance their capital structure."
PNC Financial and Fifth Third rounded out the list -- in need of $.06 billion and $1.1 billion in respective capital, according to test results.
"Fifth Third Bank's stress test results are the most positive surprise," said Hari Srinivasan, Principal of the TICC Capital Corp, T2 Income Fund, adding that overall, losses for subprime mortgage loans appear to be "light."
To raise the funds, banks will have to seek out private sources of capital or accept the government's offer to convert already existing preferred stakes in the banks -- which the government acquired through the $700 billion Troubled Assets Relief Program -- to common equity.
Converting these existing investments would help provide needed capital without requiring additional taxpayer funds. But it also means that if a bank were to collapse, taxpayers would be less likely to see their investment repaid.
"Some of the banks are going to find it easy to raise the money over the next six months," said Douglas Elliott, a financial analyst at the Brookings Institution in Washington. "Some will find it exceedingly difficult and will need new TARP money."
The idea that banks would need more money at all has raised the ire of many already-seething taxpayers.
"It's just unbelievable the amount of money that they've already got," said Trecia Harris, a bank customer in Houston. "It's like there's no end to this."
ABC News Chief Washington Correspondent George Stephanopoulos said on Good Morning America today said the administration's stress test showed that the banks are "not completely out of the woods, but they believe the government isn't going to have to go back to the taxpayers to bail out the banks."
"That clears the decks for a lot of other big items on President Obama's agenda," Stephanopoulos added.
While consumer outrage has been obvious, the health of the banks themselves has been harder to judge. Everyone knows that the ongoing recession has taken a toll on the country's biggest banks, but up until now no one has known just how dramatically they have been affected.
Geithner said Wednesday that the stress tests will be "an important next step forward" in understanding where the banks stand.
"What these results will do is they will bring in a level of transparency to bank balance sheets that will allow investors to judge, make it easier for them to raise capital, improve confidence that this system is going to be strong enough to get through this, and that will be enormously helpful," Geithner told PBS's Charlie Rose in an interview Wednesday evening. "…(I)t will help lift this fog of uncertainty over the financial system, and I think the results will be, on balance, reassuring."
The International Monetary Fund has estimated that there will be $2.7 trillion in losses on U.S. loans and securities, with the brunt of these losses being felt by the biggest banks.
Critics question whether the stress tests were tough enough.
"Overall, I remain concerned that the stress tests aren't adverse enough," said Srinivasan, noting it's possible unemployment levels could "continue to only rise through 2009," beyond the government's stress test scenario.
