- The Washington Times - Friday, May 8, 2009

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

As expected, under 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 $1.8 billion and Fifth Third must raise $1.1 billion. Nine of the 19 largest banks had 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 nonbanking 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 a bank’s managers 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 F. 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.

Citigroup, Bank of America and all the other banks charged with raising more capital already are busy doing so, primarily through asset sales 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.

Bank of America said that in addition to selling the First Republic Bank and its Columbia Management unit, it will attempt to raise funds through the sale of common stock and by converting privately held preferred stock into common shares.

“Our intention will be to reach the government’s target on our own without exchanging any of the current U.S. investment in Bank of America into mandatory convertible preferred stock,” said Joe Price, chief financial officer. “That would allow us to minimize the use of government money and put us into a position to repay the government’s investment sooner.”

Morgan Stanley said it also intends to raise $5 billion, with $2 billion from the sale of common stock.

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, resulting in $600 billon in credit losses, 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., performed the unprecedented stress tests on the banks.

JPMorgan Chase, one of the nine banks the government determined were healthy and did not need to raise more capital, boasted that it was prepared for even worse conditions than the government envisioned.

JPMorgan, Goldman Sachs and several of the other banks that received a clean bill of health have expressed hope they will soon be able to return the government bailout funds they received so they can be rid of the limits on executive pay and other restrictions the government attaches to the funds.

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,” said Mr. Geithner.

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