- The Washington Times - Thursday, May 7, 2009

The federal government on Thursday gave 10 of the nation’s largest banks six months to raise $75 billion in funds to cushion against burgeoning losses as the recession and unemployment increasingly push people into default on their loans.

As a result of stress tests completed by the government, Bank of America and Wells Fargo were given the biggest burden of raising $34 billion and $14 billion respectively to ensure the banks can withstand expected losses on mortgages, credit cards and business loans in the next two years. Citibank, which already has been working furiously to downsize and shore up its balance sheet, must raise another $5.5 billion.

GMAC, which is General Motors’ financing arm, must raise $11.5 billion, while Morgan Stanley must raise $1.5 billion and Fifth Third must raise $1.1 billion. Nine or about half of the 19 largest banks were deemed to have enough capital and will not be required to raise funds.

The government is pushing the banks to use all means possible to raise the money through private markets rather than drawing from the government’s dwindling bank bailout fund. Options for the banks include issuing stock, selling non-banking assets and converting preferred shares into common stock, which is the form of capital favored by the government and investors.

Another measure aimed at discouraging banks from seeking government assistance is a veiled threat of ousting the bank’s current management if they ask the Treasury to convert preferred shares the Treasury obtained last fall into common stock to an extent that the Treasury ends up taking majority ownership of the bank.

Treasury Secretary Timothy Geithner said the evaluation of banking managers the government is requiring will make it easier for the government to decide in the future whether it needs to replace the banks’ executives. He said the government’s goal would be to quickly return the banks to health and send them back into the private sector as soon as possible.

Citigroup, Bank of America and all the other banks charged with raising more capital already are busy doing so, primarily through asset sales and exchanges and conversions of stocks. Only GMAC appears to be in the position where it has little choice but to ask for further government assistance, raising the likelihood that the auto financing company will soon become government-owned.

While some economists and investors have criticized the tests as not rigorous enough, assuming for example that unemployment will not go much higher than the 8.5 percent level where it is today, Comptroller of the Currency John Dugan defended the assumptions the government used in projecting mounting losses on loans as a result of the recession in the next two years.

The 9.1 percent assumed level of defaults on all loans would be the highest level of losses banks have experienced since 1921, before the Great Depression, Mr. Dugan said.

“These are very severe stresses,” he said. His agency, along with the Federal Reserve and Federal Deposit Insurance Corp., were the agencies that performed the unprecedented concerted stress tests on the banks.

The regulators said they believe the “transparency” the test results provide in showing details of banks’ balance sheets will help bolster confidence in the markets and prompt private investors to be more willing to put their money in troubled banks.

“This has a level of disclosure that goes well beyond what you typically see. That will make it easier for banks to raise new equity from private sources,” Mr. Geithner said.

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