Results Of Banks' Stress Tests Unveiled
MICHELE NORRIS, host:
This is ALL THINGS CONSIDERED from NPR News. I'm Michele Norris.
ROBERT SIEGEL, host:
And I'm Robert Siegel. The verdict on the nation's 19 largest banks is now in. The government has issued the results of its stress tests. They show Bank of America, Citigroup, Wells Fargo and others short on capital. Meanwhile, JP Morgan Chase, Goldman Sachs, and American Express are among the banks regulators say don't need an added cushion against losses.
Treasury Secretary Geithner, Fed Chairman Ben Bernanke and other federal regulators just finished briefing reporters about the stress tests minutes ago. NPR's John Ydstie was there and he joins me now from the Treasury. John, back when all this started a couple of months ago, there were questions about whether some of these banks were healthy enough to survive, whether some might have to merge. What's the verdict now?
JOHN YDSTIE: Well, the message from regulators is that these banks are basically sound. They have adequate cushions against losses, adequate capital for the current environment. What some of them don't have, according to the results of these stress tests, is strong enough capital positions to provide an adequate buffer against losses if the economy gets worse than is currently expected, and they're the ones that the regulators are requiring to raise additional capital.
SIEGEL: And is it clear what they mean by worse than is currently expected?
YDSTIE: It's - worse that is currently expected? Yes, we are talking about an economy which has another 20 percent loss in home values, or unemployment rises above 10 percent or the economy doesn't grow at all in 2010.
SIEGEL: Okay. So some banks under those conditions they found - I think 10 of them of the 19 would need more capital. Where would they get the capital?
YDSTIE: Well, they could increase capital by selling assets which some of the banks including Citigroup are already doing. Of course, they could create it by selling more shares to the public and actually this is what the government wants them to do because capital in the form of shareholder equity is the strongest kind of capital - the first line against - line of defense against losses.
Now banks can sell more shares to the public because investors are still wary, the government has told them that it will help out by allowing them to convert some of the TARP money it injected into the banks over the last several months from preferred shares that the government bought then into common equity, if they need it.
SIEGEL: But that would mean that if that were done that the taxpayers money, which has now gone for preferred shares which in effect are bonds or loans, I guess, would be in a riskier situation as equity stock in the banks.
YDSTIE: Yeah, that's right. They would be riskier. The taxpayers would give up the interest they get on these preferred shares in the form of dividends. They'd lose all the money if the bank fails. If the government converts these shares to common equity, the government becomes an owner and risks losses. The banks really don't like this because the government would also become a voting shareholder and even have more control of the banks.
So the government has come up with this solution: It's a two step process. First, the government would swap the current preferred shares for convertible preferred shares with no voting rights. The banks would have the potential to convert them into common equity if they faced losses. The government's actually already made this arrangement with Citicorp and that's why the amount of capital is needed is smaller than that of Bank of America. Bank of America is looking at $34 billion more, Citicorp four or five billion.
SIEGEL: Five and a half billion, although indeed Citicorp by other measures could be as much as $50 billion in need of capital. They know where to find it is what they're saying. Just very briefly, that's what the government would do with its preferred shares, would private investors do that? I mean they're not representing administration policy to keep the banks afloat. They're just looking for better investment.
YDSTIE: Well, there are some private equity owners who have already done this. Citibank has had some of its preferred shares owned by private interests agree to sell them - or convert them in this fashion too.
SIEGEL: Thank you, John.
YDSTIE: You're welcome, Robert.
SIEGEL: NPR economics correspondent, John Ydstie, speaking to us from the Cash Room at the U.S. Treasury.
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