- The Washington Times - Saturday, May 2, 2009

The Federal Reserve and other regulators have delayed releasing the results of “stress tests” they conducted on the nation’s 19 biggest banks because they are not sure how to explain them to the public, and they are concerned how financial markets will react, analysts said.

The stress tests looked at whether the banks have sufficient capital to withstand an economic downturn more serious than the one most economists expect. The widely anticipated results were scheduled to be released Monday, but regulators have pushed back the release day to Thursday.

“The big question is, what is the Fed going to say next week? Nobody knows. I’m not sure they even know what they’re going to say,” said Bert Ely, an expert on banking regulation who has been highly critical of the stress test process.

“It’s a mess. I shake my head in disbelief over all this stress test business,” Mr. Ely said. “It’s a puzzle to everybody.”

The government had promised to announce the stress test results in February. The bank-by-bank details that are expected to be released next week offer the sort of information that is generally seen only by bank examiners.

At least six of the 19 banks, including Citigroup and Bank of America, reportedly will need to increase their capital levels.

Raising capital in the private market would be difficult and expensive, said Vincent Reinhart, a longtime senior Fed official who is a resident scholar at the American Enterprise Institute.

A second option would be more capital injections from the federal government. But Mr. Reinhart does not believe the $110 billion remaining in the Troubled Asset Relief Program, or TARP, is adequate to fill the capital hole, which he estimates to be $250 billion to $300 billion “or bigger.”

“What’s left in TARP will only be a down payment,” agreed Christopher Whalen, a managing director at Institutional Risk Analytics, a bank research firm.

Mr. Reinhart said the Treasury is hoping for a two-step process. “The trick for Treasury will be to use its remaining TARP resources to reassure the markets and then to get Congress to pony up more money,” he said.

That is a tall order.

President Obama’s budget included a $250 billion “place holder” for potential additional financial stabilization efforts. That amount could leverage an additional $500 billion from private investors to “support $750 billion in [toxic] asset purchases” from the banks, the budget projected.

The combined $750 billion anticipated by the White House exceeds the $700 billion TARP authorization that Congress approved in October. But Congress is in no mood to increase bailout funds for Wall Street, much less double them, lawmakers of both parties have said.

Democratic budget committee chairmen pointedly excluded the $250 billion “place holder” from the budget resolution that the Senate and House approved on Mr. Obama’s 100th day in office.

A third option to increase bank capital would be to convert interest-paying preferred shares, which is much like debt, into common stock. This would be helpful to the banks but riskier for the taxpayer.

Experts agree that this may be the leading option. Its biggest drawback is the danger of creeping nationalization of banks. Its largest benefit is that it is cost-free to U.S. taxpayers yet boosts bank capital in a way that has meaning to investors.

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