Results Of Banks' Stress Tests Unveiled

Bank of America, Citigroup, Wells Fargo and others short on capital, according to the results of the government's stress tests issued Thursday. Meanwhile, JPMorgan Chase, Goldman Sachs and American Express are among the banks regulators say don't need an added cushion against losses.

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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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After Stress Tests, Banks Eager To Repay Bailout

The results of the government's stress tests on the nation's 19 biggest banks are being made public Thursday. Investors, taxpayers and members of Congress are eagerly awaiting results. The tests are aimed at determining whether the banks are healthy enough to weather a severe recession.

Like nervous parents who've been pacing outside a sick child's hospital room waiting for test results, bank investors are getting some qualified good news. While some of the biggest banks are not exactly healthy, at least it appears they're going to live.

Analyst Matthew Warren of Morningstar says that was enough to send bank stocks climbing sharply Wednesday.

"There's been a big rally in bank stocks from the March 9th or so lows. And I think you can attribute part of that to the stress tests, actually, ironically," he says.

The "stress tests" conducted by the Federal Reserve and other regulators are designed to show how much more money banks would need to keep lending, even if the economy turns worse. The Fed stresses this is a "what if" exercise, not a prediction of what's actually going to happen.

Bank lobbyist Scott Talbott of the Financial Services Roundtable says there's some comfort in knowing that a bank can weather the worst.

"I think the markets understand that now, and as the results begin to roll out, they are either not as bad as expected, or are as expected. So it's sort of a soft landing for the stress tests," he says.

Some banks will have to raise more capital, including Wells Fargo, Citigroup and Bank of America, which reportedly needs to boost its capital cushion by a whopping $34 billion. But even Bank of America saw its stock price soar by 17 percent Wednesday.

Fed Chairman Ben Bernanke told lawmakers this week that banks have a variety of ways to raise the money they need, without coming back to the government for additional help.

"To the extent that there are banks that need capital, our hope is that many of them will be able to raise that capital through either private equity offers or through conversions and exchanges of existing liabilities to strengthen their capital bases," he said.

Bernanke means that banks could convert the loans they got from the government's Troubled Asset Relief Program into common stock. One downside of that approach is that it could make the federal government the biggest shareholder in some of the banks.

The healthiest banks — including JPMorgan Chase and American Express — don't need additional capital. Some of them are eager to move in the opposite direction, repaying the TARP money they borrowed from the government.

Warren, the analyst, says that would save the banks the cost of paying interest on the government loans. And it would free them from uncomfortable rules limiting executive pay.

"The TARP money went from being a signal of strength to really a signal of weakness, especially as we've moved into the stress test phase. So, now it's a signal of strength to be able to pay it back. And I think some of these stronger banks would like to do that as quickly as possible and move on," Warren says.

But the government is saying "not so fast." Before they repay the TARP money, big banks will first have to show they can borrow money elsewhere without a government guarantee. Warren says regulators don't want banks to wind up strapped and looking for additional bailouts later.

"If you're going to let the banks repay the TARP, you want them to be able to stand on their own, and not have to come back to the government and ask for that money back — especially considering that Congress might not cooperate," he says.

But Talbott, the bank lobbyist, says he hopes regulators won't raise the hurdles too high for banks that want to repay TARP money. He says the idea that some banks are even considering repayment and reporting quarterly earnings is a sign of how far the financial sector has come.

"Six months ago, who'd have thought we'd be talking about earnings or repayment of TARP? But yet here we are," he says. "And I think those are all positive signs. And repayment of TARP should be viewed as a positive step that the institution is strong enough to be able to return that money, and that the program is working again and the economy is being restored."

A healthy banking system is critical to a broader economic recovery. Warren says that while banks aren't there yet, the stress tests offer some reassurance.

"Some of the tough underlying realities are still there," he says. "So you can't get too excited. But it's good to know that at least the large banks are going to be healthy and operating in a more normal way."

Banks that need additional capital will have 30 days to come up with a plan, and then five more months to raise the money.

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