Weak Banks Need To Raise Extra Capital
RENEE MONTAGNE, host:
We turn now, as we often do, to David Wessel. He's economics editor of the Wall Street Journal. Good morning.
Mr. DAVID WESSEL (Wall Street Journal): Good morning, Renee.
MONTAGNE: Stress tests. David, last year the government went to great effort not to point to any one bank as being particularly weak, so they made all banks accept TARP money; that was one of the reasons. But now, these stress tests do separate the weak from the strong. Why the change now, and what might be the repercussions?
Mr. WESSEL: Well, that's absolutely right. Last year, when the government put money in to the banks, it told the nine big banks they had to take money whether they wanted it or not, and leaned on the strong banks to take the money so the weak wouldn't stand out. Now, they are going out of their way to distinguish between the weak and the strong, and I think they're doing it for a couple of reasons. One is that the cloud over the weakest banks was creating what Secretary Geithner called a fog of uncertainty over all the banks and making life miserable for all of them.
Secondly, it wants to liberate the strong banks to go out there and lend and get the economy going again, and pressure the weak banks to come up with a plan to strengthen themselves. It's a very interesting experiment, actually, in transparency, in saying that we're going to be very open about our opinion about these 19 big banks.
You're going to see some ugliness as well as some beauty, and we're hoping that that will help the markets function better, not scare everybody that the situation is terrible.
MONTAGNE: Now, we've just heard that the Bank of America, among other large banks, will need to raise billions of dollars in capital. How are they going to do that?
Mr. WESSEL: That's right. Of the $75 billion that the government says the banks now need to raise, about $34 billion of that is one bank, Bank of America. We can see from Citibank that there are ways to do this by converting what's known as preferred stock into common stock. So Bank of America will do quite a bit of that.
Bank of America, like any bank, has a couple of choices now. If they can, they'll go out and raise equity by selling shares. Wells Fargo and Morgan Stanley said yesterday they're going to do that. They can sell off businesses, and then they take the money and put that into their capital cushion. They can do this conversion of preferred stock, either preferred held by private investors or by the government already, and convert that.
Or the worst case for the banks is they can't do it privately, and they have to come to the government, and the government will give them more taxpayer money to make them strong enough to withstand a very weak economy.
MONTAGNE: Well, that TARP fund still has something like $109 billion left in it. What are the chances that the banks will go back - or rather, the Treasury will go and ask, for the banks, some of this money?
Mr. WESSEL: We asked Secretary Geithner that yesterday, and he said that there's enough money in the TARP now, plus the money that will be paid back by some of the stronger banks, to make good on the capital needed in this adverse scenario, the bad economy that they put into this exercise and the losses that they anticipate if things get bad.
So he says that he doesn't think they'll need to go immediately. But he repeated, as President Obama has, if they need more money they'll go and make the best case they can to Congress for it. And I think that one advantage of this whole exercise is it would allow President Obama to say to Congress that if we do need - if he thinks the banks do need more taxpayer money, look, I did everything I could to avoid getting to this point, and now we need some.
MONTAGNE: If, in fact, the Treasury does put more money into these banks, will management - will we see management be fired?
Mr. WESSEL: I expect so. Secretary Geithner was very cagey about that yesterday, but he said that if the taxpayers had to put a significant amount of more money into any one bank, they'd review their managements. I think that's a code word for, if they have to take a bigger, bigger stake in these banks, it suggests that the bank managements have failed and they - probably the political pressure to put new people in would be very strong.
MONTAGNE: Now, just briefly, David, now that the government is done with these stress tests, does that mean there are no big surprises coming down the line from the banks?
Mr. WESSEL: Boy, I hope so, but I doubt that. I think - what we know is that the examination has been for three months, 150 federal bank examiners and economists going through the books of the banks. One hopes is that if there's any really big surprises in there, they would have found them.
But these banks are huge, and the economy is still very treacherous, and there's always the possibility that there's some unknown out there or that the economy takes such a big turn for the worse, that the bank - or one of the banks runs into unanticipated problems.
MONTAGNE: David Wessel is economics editor of the Wall Street Journal. Thanks very much.
Mr. WESSEL: You're welcome.
(Soundbite of music)
MONTAGNE: And you can get the complete results of the government's stress tests at npr.org.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.