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.
Are the Banks Insolvent?
Government officials have indicated that the banks are currently well-capitalized.
"I've looked at many of the banks and I believe that many of them will be able to meet their capital needs without further government capital," Federal Reserve chairman Ben Bernanke told the Joint Economic Committee on Tuesday.
But Nobel Prize-winning economist Paul Krugman argues that a number of the banks are actually insolvent.
"The 19 banks are not fine," he said Sunday on ABC News' "This Week Green Room."
"It's not going to work," Krugman said of the stress tests. "I give...Geithner points for fine use of the English language. A few weeks ago he said the vast majority of U.S. banks are well-capitalized, which is undoubtedly true -- there are probably 7,500 banks that are just fine. Unfortunately the 19 banks that are not fine have two-thirds of the assets."
But Geithner said yesterday that none of the nation's 19 biggest banks subjected to the government's stress tests are insolvent.
"None of those 19 banks are at risk for insolvency," Geithner told Rose. "Now, again, these banks, they bear the biggest responsibility for making sure that they can reassure investors that they're going to be strong and viable in the future.
"We'll indeed help them do that if that's necessary, but they bear the responsibility for making sure they can convince their investors and their creditors that they can get through this with a strong, viable franchise, and I think they're going to be able to do that."
Geithner acknowledged that some banks will complain the tests were too tough, while some critics will complain the tests were not tough enough. But he said the tests were important so the government could "look under the hood" of the big banks.
"For the first time ever, we brought the nation's financial supervisors together, and in an unprecedented step, asked them to do a careful look under the hood, to take a careful look at how much -- how strong these institutions were in the event things got worse," he said.
Regulators provided an aggregate assessment of the banks on the whole as well as an individual breakdown of the specific institutions. This information included estimated losses for certain loans and outlined the resources to absorb these losses under a worse-than-expected economic scenario.
Banks will have to produce plans detailing how they will raise the capital necessary to withstand possible losses in the future.
The banks will have to submit these plans within 30 days and enact them within six months, according to a government statement issued Wednesday. The banks will also be expected to detail how they plan to repay the billions in government funds they have already received.
Are the Stress Tests Stressful Enough?
Earlier this week FBR Capital Markets attempted to replicate the government's tests to predict how banks would fare. Based on the FBR assessments, 11 of the 12 commercial banks that were tested will have to raise more capital. FBR did not profile non-commercial banks like Goldman Sachs because it anticipates that most, if not all, of them will pass the tests.
According to FBR's assessment, the only commercial bank to emerge unscathed from the replicate tests was JP Morgan Chase. Others came out in far worse shape. FBR estimated that Bank of America, for example, will need to raise around $19 billion in additional capital, and Wells Fargo will need over $12 billion.
"I think the banks still need a lot of capital," said FBR's Paul Miller. "I don't think the stress tests are stressful enough."
But after the demise of Lehman Brothers last September, Miller said policy-makers in Washington are not prepared to let any other major banks collapse.
"The government is basically saying we're not going to fail these giant institutions anymore because what's happened to Lehman has scared the living daylights out of them," Miller said. "I do think that failing some of these institutions is not as bad as the market or the government thinks it will be, but I know they're so afraid after what happened to Lehman…so what it means is that you're going to put a lot more capital into them."
"The government needs banks to go up because they don't have the money to fix them," he added. "And if they can raise confidence in these banks and get banks to raise money in the private sector, that fixes a giant headache on Capitol Hill."
But this plan, Miller said, will not work. Instead, the only solution for the government is to spend the necessary money to temporarily take over the banks and rid them of their toxic assets.
"The government has a patchwork of policies that is leading us to jump from crisis to crisis to crisis instead of doing what's really needed and that is to close down some of these institutions, take the bad assets off their balance sheets, form a ["bad bank"], and then sell these banks back out to the Street, but the government doesn't want to do it because it's expensive."
Too Big to Fail
Although many of these larger banks have been deemed "too big to fail," the effects of the nation's recession can be seen in the failures of smaller banks. Thus far this year 31 community banks have already collapsed under the weight of the recession, and the Federal Deposit Insurance Corporation expects dozens more before the end of the year.
Despite the government's belief that these tests will clear up the state of the nation's biggest banks, some critics have argued that stress tests won't make the effects of the crisis any clearer.
"It's causing a lot of confusion," Miller said. "I think it was poorly done."
Joseph Mason, the Moyse/LBA Chair of Banking at the Louisiana State University Ourso School of Business, echoed that criticism.
"Stress tests will reveal nothing of value, and the financial crisis uncertainty will continue to drag down economic growth," he said.
Gerald Seib, Washington bureau chief for the Wall Street Journal, contended that the stress tests are "a no-win situation".
"If the government says most or all of the banks are fine, then no one is going to believe them because it's going to look like it's a whitewash," Seib told ABC News on Sunday. "If they say, 'well, here's some serious problems,' then everybody gets panicked and they're wondering how far those problems go. I don't know how we go through the stress test thing without having one or the other adverse consequence."
Should You Pull Your Money Out?
Experts advise that, no matter how a bank fares on the stress tests, consumers should remember that most bank deposits -- specifically, those up to $250,000 -- are insured by the Federal Deposit Insurance Corporation and won't be threatened even if the bank holding the deposit is in trouble.
Some, however, insist on pulling their deposits from the big banks, not because they're worried about the safety of their cash, but because they're just fed up with banks that have received taxpayer bailouts.
That's what Houston resident Harris has done. She recently closed a bank account with JPMorgan Chase and a credit card account with Bank of America.
"I'm sick of the government keeping them afloat," Harris said. "It burns me up."
But Dave Kansas, the author of "The Wall Street Journal Guide to the End of Wall Street As We Know It," says consumers like Harris might want to think twice about pulling money from bailed-out banks.
"Taking a moral stance isn't always the best financial stance," he said.
In an effort to attract more business, some less-healthy banks may offer new incentives to bank customers, like higher interest rates on certificates of deposit. But those banks may also be raising fees and taking other consumer-unfriendly steps to also raise cash, Kansas said.
"It's a time when individuals need to be very vigilant, not because their cash deposits are at risk but because of the pressure on the banks," he said. "The opportunities for individuals are going to be varying so much between different banks, individuals need to keep a closer eye on that."
ABC News' Charlie Herman, Zunaira Zaki, Mary Bruce and Alice Gomstyn contributed to this report.