- The Washington Times - Wednesday, April 29, 2009

Citigroup and Bank of America, each of which has already received $45 billion in government bailouts, will need to raise still more capital based on the stress tests that regulators recently completed, banking analysts said Tuesday.

Other financial institutions among the 19 that underwent the stress tests will also need to increase their capital levels, the analysts said, raising questions about whether the government has enough bailout money to save them all.

The stress tests projected how the financial institutions would perform over the next two years under a “more adverse” scenario reflecting a deeper and more sustained recession than most economists now expect.

In addition to their $45 billion government bailouts, Citigroup and Bank of America have entered into taxpayer-guaranteed loss-sharing agreements with the government involving $306 billion in troubled Citigroup assets and $118 billion in questionable Bank of America assets.

Bank of America will hold what promises to be a contentious annual shareholders meeting in Charlotte, N.C., Wednesday.

Troubled institutions are expected to continue to have difficulty raising capital in the private market. So, one big question is whether the estimated $110 billion remaining in the accounts of the $700 billion Troubled Asset Relief Program (TARP) will be adequate to fill the collective capital holes.

“We don’t know how big the holes will be,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight. “But [Treasury Secretary Timothy F.] Geithner has said the capital will be provided one way or another, even if he has to sell his Gucci shoes.”

More likely, the administration will eventually have to go back to Congress, which is so reluctant to provide more TARP money that it removed President Obama’s $250 billion bailout “place holder” from the 2010 budget.

“Of course they’re going to need more money,” said Christopher Whalen, a managing director at bank research firm Institutional Risk Analytics. “The hole these banks are facing is huge. What’s left in TARP will only be a down payment. And there will be no more money from Congress,” said Mr. Whalen, who believes Congress is so outraged over the bailouts that it will not appropriate another dime.

The federal government’s strategy so far has been to delay the bad news as long as possible, said Vincent Reinhart, a scholar at the American Enterprise Institute who served for years as a senior official at the Federal Reserve. By encouraging the change in mark-to-market accounting and emphasizing recent bank industry profits, federal officials have ignored the legacy losses on the bank balance sheets, “which are so big that they would swamp the government’s remaining TARP resources,” Mr. Reinhart said.

“Geithner’s plan is to keep the smallest footprint on the budget as possible” by using the Fed’s printing press, public-private partnerships and guarantees by the Federal Deposit Insurance Corp., said Mr. Reinhart. “It’s bad policy because it does not get to closure. And it’s a very expensive way to attack the problem.”

Mr. Reinhart said the International Monetary Fund’s latest figures were on the mark. In its Global Financial Stability Report released last week, the IMF estimated that U.S. banks will need between $275 billion and $500 billion in new capital.

“The only money left on the table belongs to the bondholders,” Mr. Whalen said. “GM is the model. The government must sit the bondholders of Citi and Bank of America down and make them convert at least a third of their bond debt to common equity.”

Bert Ely, an expert on bank regulation, has been very critical of the highly publicized nature of the stress tests, whose results will be made public next week. “I don’t think they’re going to say that anybody flunked,” he told The Washington Times. “That’s like saying the hole is so deep that nobody will provide private capital.”

There has been much disagreement among regulators about whether to make the test results public, he said.

“There’s been a lot of finger-pointing at Geithner from the Fed and other regulators,” Mr. Ely said. “This whole thing is highly politicized.”

Mr. Ely expects next week’s unveiling of the stress-test results “will be a striptease with vague verbiage and pabulum. They now face serious credibility problems, especially if they say no bank has failed,” he said. “None of this was thought through. There’s no chess players in this group.”

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