Banks are stressed out. Not about their capital base or loan loss reserves. They’re stressed out about an uninvited guest sitting in their boardroom. Timmy, you’re mother is calling you.
The feds have determined that our biggest financial institutions need about $75 billion in equity to shore up their capital bases. If the banks can’t raise the money, the folks over at Treasury have a plan that could eventually give it a substantial stake in the banking system. As far as they’re concerned, banks think Geithner& co are swine flu carriers. No, thank you. Take a look at Citicorp or GM or Freddie Mac and you’ll understand why: Government ownership is no fun. Freddie Mac’s CEO quit earlier this year after just a few months on the job, reportedly because he couldn’t stand clearing every decision through the regulators. And banks with bailout money are not happy to hear from taxpayers yelping about their outsized paydays.
So the banking giants are on the prowl in the capital markets.
Wells Fargo has already announced plans to raise $6 billion in stock; the stress test results reveals that it needs a total of $13.7 billion. Morgan Stanley, which needs a mere $1.8 billion, says it will raise $2 billion. Bank of America, in search of nearly $34 billion, plans on raising $17 billion through stock sales and conversions of preferred shares to common. It will raise the remaining $17 billion through asset sales. BoA has had a singularly testy relationship with the Feds and is pushing back hard to get them out of its hair: CEO Ken Lewis is saying no thank-you to a loss-sharing deal with Treasury to backstop losses on up to $118 billion in assets. Now that’s confidence.
To be fair, Treasury is not all that anxious to become a shareholder in Wells Fargo or any of the other companies that came up short in the Supervisory Capital Assessment Program. The terms of engagement are not nearly as attractive as other government programs that hand out money in exchange for different types of assets at reduced rates. It’s geared to get banks out of their hair. And the paperwork on the capital plan, which would allow banks to exchange the TARP preferred for something called mandatory convertible preferred shares, is much more complex.
Amazingly, the stock market is loving the results of the stress test. Geithner and Federal Reserve Chairman Ben Bernanke have convinced everyone that the banking system is perfectly solvent, just a little bruised. And without any real peek inside the bank portfolios, investors are accepting the say-so of the dynamic duo. The report gives a sense of some weak spots but doesn’t lift the veil on the toxic assets — originally considered the vortex of the problem.
But after a quick run through the numbers, I can tell you the banks all have weak spots and the stress test was not so stressful. In the worse cast scenario, it assumes GDP declines by 3.3% in 2009 and edges up 0.5% in 2010; unemployment would rise to 8.9% in 2009 and 10.3% in 2010.
Even JPMorgan Chase, the golden boy of the bunch, has some real weak spots. According to the stress test, in the so-called “more adverse than expected” circumstance, JPM would need to write off $21.2 billion in credit card loans, or 22.4% of its portfolios. But lucky Jamie Dimon: His capital cushion can absorb the onslaught, the regulators declared
Citicorp would need to write off $19.9 billion or 23% from its credit card portfolio in the more adverse scenario. It is still short $5.5 billion in capital. And that’s after $87 billion in government support and preferred share conversions. The bank that never sleeps probably should have caught a few Zs before okaying second lien mortgages. Expected losses: $12.2 billion, or 19.5% of the portfolio.
It will be wondrous to track Morgan Stanley, Wells Fargo and Bank of America as they test the appetite of investors for new bank shares. Their stock has tripled in value this year, so somebody sure must like them. And if all else fails, before these too-big-to-fail giants faint into the arms of the taxpayer, they could try one last thing, a suggestion from @insomniacdee on Twitter: A massive bake sale.
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