Big Banks Get Stress Test Results

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The nation's 19 largest banks got the final results from the government's stress tests on Tuesday. Some were told they need to raise more capital in order to be considered healthy. And others learned they are in good enough shape to withstand an even worse recession.

The results are scheduled to be released to the public Thursday by Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.

The stress tests are an attempt by the government to measure how banks would fare if the economy got significantly worse, specifically, if home prices fell another 20 percent and the unemployment rate rose to 10.3 percent. The jobless rate was 8.5 percent in March.

The results have been eagerly awaited by investors. And there's been no shortage of rumors and anonymously sourced reports about which banks will need to add reserves. Citigroup, Bank of America and Wells Fargo are on the list of banks that may need more capital, according to news reports.

The banks have orders not to talk about the tests, but Eugene Ludwig, who regulated banks as comptroller of the currency in the mid-1990s, says he believes at least 10 of the 19 banks will be told to raise capital. Though most of them, he says, will likely just need a modest topping up.

"A couple of them will need some serious capital, but the belief is that they can get it either in the marketplace or will get it from the government," he says. "So, I think it will by and large be comforting to the public."

Ludwig did not want to mention any institutions by name since a number of the 19 big banks are clients of his consulting firm Promontory Financial Group.

Nowhere are the stress test results more anxiously awaited than on Capitol Hill, where lawmakers have made it clear they're not interested in giving the banks more money.

At a hearing Tuesday before the Joint Economic Committee, the Fed's Bernanke declined to provide a preview of Thursday's report. But he did answer this question from Rep. Carolyn Maloney (D-NY) about whether Congress would be asked to pony up more funds in addition to the $110 billion that remains in the Troubled Asset Relief Program.

"Well, I would leave that to the administration," Bernanke said. "I think that they've just recently indicated they don't think there is a near-term ... need."

A number of analysts have interpreted the administration's comments as an indication that the stress tests will show the nation's banks are basically healthy.

Douglas Elliott, a former investment banker who is now a fellow at the Brookings Institution, says he believes the regulators will conclude that all together the 19 big banks will need to raise between $100 billion and $200 billion in capital.

"If it's lower than that, it'll be a real sign that the regulators think the situation is better than we do," Elliott says. "On the other hand, if it's more than that ... we're in trouble because the political constraints on going higher are strong."

Investors seem to believe the results of the stress tests will be quite positive. For much of the past couple of weeks, shares in many of the big banks have risen. That's happened even though adding capital could dilute the value of those shares, at least temporarily.



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