- The Washington Times - Thursday, May 7, 2009

Citigroup and Bank of America, the nation’s biggest troubled banks, are furiously trying to sell off assets to build a cushion against losses in a downsizing strategy encouraged by the federal government that may save taxpayers from having to bail them out again.

The two mega-banks, which already have received more than $45 billion each in taxpayer funds, are expected to have to raise more in coming weeks because of burgeoning losses detected in government “stress tests,” whose results are due out Thursday. But the $34 billion needed by Bank of America, the more than $5 billion needed by Citigroup and $15 billion needed by Wells Fargo are not expected to come mostly from taxpayers this time. The Federal Reserve and Treasury are encouraging the banks to sell stock or assets to raise the cash.

A few big banks - including JP Morgan and Goldman Sachs - have passed the stress tests, insiders say, taking a step toward their goal of repaying taxpayers the billions of dollars they received so they can free themselves of further government meddling. The banks have chafed under the close public scrutiny and restrictions on executive pay and perks that came with the bailout funds.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., called for a general downsizing of the banks that the Treasury has designated “too big to fail,” a special status that has enabled them to avoid closure by the FDIC while asking for repeated taxpayer bailouts.

In the past, legislators and regulators enacted deregulation measures that encouraged concentration in banking on the theory it would result in more efficient markets and better services for consumers, but Ms. Bair said experience has not borne that out. Rather, the collapse and bailout of these banks in the past year shows there is no good reason to allow banks in the future to get so big and interconnected that they cannot be allowed to fail.

“Bigger is not necessarily better,” she said in testimony before the Senate Banking, Housing and Urban Affairs Committee. “A strong case can be made for creating incentives that reduce the size and complexity of financial institutions.”

Forcing the big banks to divest assets before receiving further taxpayer assistance is one way for the government to encourage the banks to downsize.

Banks that must raise additional capital as a result of the stress tests will have one month to come up with a plan and six months to raise the funds. But Citigroup and Bank of America have not waited for the test results to start searching for buyers of key assets. Both banks want to avoid taking more taxpayer funds, with strings attached, or granting the government further ownership and control through the conversion of Treasury’s preferred shares to common stock.

Bank of America is looking to sell subsidiary investment companies Columbia and U.S. Trust, as well as part of its stakes in BlackRock, China Construction Bank and Brazil’s Itau Unibanco. Citigroup is selling its Japanese unit, Nikko Cordial, while seeking to exchange about $5 billion of privately owned preferred stock for common shares to satisfy a total of $10 billion in capital it must raise.

As further discouragement to big banks, regulators and legislators are eyeing plans to require mega-banks to pay into a government fund to cover bailouts in the future, and hold higher levels of capital than smaller banks to guard against losses.

Along with stricter regulation and supervision, legislators and analysts say the new measures will discourage banks from getting so big and unwieldy in the first place.

“The U.S. has led the way with its proposal for a ‘too big to fail tax,’ ” said Hugo Dixon, an analyst with Breakingviews.com, attributing the idea to Treasury Secretary Timothy F. Geithner, though he has not acknowledged publicly that his goal is to shrink the size of banks.

“Such a regime is a good idea. It might even encourage giants to break themselves up,” Mr. Dixon said.

The idea of downsizing the big banks so they are no longer “too big to fail” is voiced increasingly by Republicans in Congress.

Rep. Spencer Bachus, Alabama Republican and ranking member of the House Financial Services Committee, has proposed establishing a federal regulator to oversee big banks and close them in an orderly way when they fail to prevent future bailouts.

“It is time that we extracted ourselves from the cycle of multibillion-dollar, taxpayer-funded bailouts,” he said. “If we have learned one lesson in the last year, it is this: When the government tries to manage and run these large corporations, no one wins.”

Some analysts say that penalizing big banks will simply encourage banks to cluster in the size range just below the threshold established by the government.

Still other legislators and finance analysts say the big banks should not be penalized too much because they perform important functions in the globalized economy.

After decades of concentration, “the largest U.S. financial institutions hold most of the financial assets and liabilities of the sector,” said Martin Baily, senior fellow at the Brookings Institution.

“We need very large financial institutions given the scale of the global capital markets,” he said. “Of necessity, some of these may be “too big to fail” and must be bailed out by taxpayers, he said.

Mr. Baily said that the big banks won’t be saved by fire sales of their assets or new stock investments, as the Fed and Treasury are hoping. He said they will require much bigger handouts from the government.

“Getting the U.S. financial sector up and running again is essential, but will be very expensive and is deeply unpopular,” he said. “If Americans want a growing economy next year with an improving labor market, Congress will have to bite the bullet and provide more Treasury [bailout] funds, maybe on a large scale.”

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