Bloomberg (Link) - Rebecca Christie (May 6, 2009)
Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and GMAC LLC are among the companies judged to need additional capital according to results of regulators’ stress tests on the 19 largest U.S. banks.
Bank of America has the biggest shortfall, at $34 billion, according to people familiar with the matter. Citigroup’s requirement for deeper reserves to offset potential losses over the coming two years is about $5 billion, people with knowledge of that bank’s results said. Wells Fargo requires about $15 billion, while GMAC’s need is $11.5 billion, one person said.
Morgan Stanley may need between $1 billion and $2 billion, according to people familiar with the matter. Earlier today, Bloomberg News reported that Morgan Stanley needed no new capital, citing a person 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.
The Federal Reserve and other regulators said today that banks that have to bolster their capital will have until June 8 to develop a plan. Goldman Sachs Group Inc., MetLife Inc., JPMorgan Chase & Co., Bank of New York Mellon Corp., American Express Co., BB&T Corp. and Capital One Financial Corp. were deemed not to need additional funds, the results show.
Stocks rallied after the news, sending the Standard & Poor’s 500 Financials Index to its highest level in four months. The results are the culmination of weeks of investigations, led by the Federal Reserve, into the banks’ lending practices, funding strategies and securities and loan portfolios.
“The markets are telling us we’re in a recovery and the banks are beginning to heal,” William Isaac, former chairman of the Federal Deposit Insurance Corp., said in an interview today. The end of the stress tests after “three months of water torture” is providing investors some relief, he said.
The regulators put an emphasis in their reviews on tangible common equity, and will give firms needing bigger reserves six months to meet their requirements. Citigroup’s assessment reflects the New York-based bank’s previously announced plan to convert some of its preferred shares into common stock.
Spokespeople for all of the 10 banks declined to comment.
The S&P 500 Financials Index climbed 8.1 percent by the close in New York. The broader S&P 500 Stock Index was up 1.7 percent at 919.53. Citigroup jumped 17 percent to $3.86, Wells Fargo advanced 15 percent to $26.84 and MetLife gained 17 percent to $32.35.
Before today’s news, “there was some portion of the market that was buying into the doomsday stuff, that the banks are insolvent and need massive capital,” 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 my client conversations today.”
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. Lenders may outline their strategies to add capital, or in other cases buy out government stakes, after tomorrow’s official release of the results.
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.
Not ‘Hands Off’
While it’s unlikely to influence day-to-day operations, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Fed Chairman Ben S. Bernanke told lawmakers yesterday.
White House spokesman Robert Gibbs today 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.
Wells Fargo, the fourth-largest U.S. bank by assets, requires about $15 billion, a person familiar with the matter said. The San Francisco-based bank got $25 billion in taxpayer funds last year. Wells Fargo spokeswoman Julia Tunis Bernard declined to comment.
The bank’s shares have dropped 13 percent since it acquired Wachovia Corp. in December. Investors have been concerned that losses in Wachovia’s $482 billion loan book, which includes $118 billion of option adjustable-rate mortgages, will hurt Wells Fargo’s balance sheet and erode capital.
In accordance with accounting rules, Wells Fargo took initial writedowns on $37.2 billion of Wachovia’s troubled loans.
Chairman Richard Kovacevich in March called the administration’s stress-testing program “asinine” and Berkshire Hathaway Inc. Chairman Warren Buffett, whose company is Wells Fargo’s biggest shareholder, said May 3 that Wells Fargo didn’t need any more capital.
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 Troubled Asset Relief Program last year.
“Going forward, we just need banks 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.
People familiar with the matter said May 4 that about 10 of the 19 firms will be deemed to need additional capital. The number increased from six to eight a week ago after regulators boosted their target for the reserves the firms must hold.
Officials favor tangible common equity equal to about 4 percent of a bank’s assets, up from an earlier target of 3 percent, people with knowledge of the deliberations said last week. 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.
Tangible common equity “is very important for market perception right now” FDIC Chairman Sheila Bair told lawmakers at a hearing today in Washington. Institutions that need to raise their capital levels “need to look to nongovernment sources first. The Treasury can be there as a backstop,” she also said.
The Treasury has said about $110 billion of TARP funds remain.
Bank of America’s capital shortfall is the biggest among the 19 banks, people familiar with the matter said yesterday. Spokesman Scott Silvestri in Charlotte, North Carolina, declined to comment. Analysts’ estimates of the company’s shortage of common equity have ranged from zero to as much as $100 billion.
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.
Bank of America is considering selling part of its stake in China Construction Bank Corp. immediately instead of in a few weeks, the Financial Times reported.
While Citigroup has received the biggest rescue so far among commercial banks, it has taken steps in recent weeks to bolster its capital. The New York-based company plans to get a $2.5 billion boost to tangible common equity from selling brokerage and investment banking units in Japan. It’s also pushing to complete a venture with Morgan Stanley ahead of schedule to lock in a $5.8 billion gain, people familiar with the matter said.
Citigroup spokesman Stephen Cohen declined to comment.
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.
JPMorgan spokesman Joseph Evangelisti in New York declined to comment.
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.
Morgan Stanley converted to a bank in September to gain access to financing from the Fed after Lehman Brothers Holdings Inc. went bankrupt, damaging investor confidence in securities firms. In October the company raised $9 billion in cash by selling a 21 percent stake to Japan’s Mitsubishi UFJ Financial Group Inc. and got $10 billion investment in TARP money.
The company has slashed leverage and assets on its balance sheet and scaled back risky activities like principal investing and proprietary trading. It cut its dividend 81 percent last month to 5 cents.
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 yesterday it “helped us dodge what would have been a truly cataclysmic collapse of the global banking system.”
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.