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Thursday, May 7, 2009

Stress Tests Show Big Banks Will Need to Raise Billions More

Some of the nation's largest banks will need to raise billions of dollars in additional capital after results of the government stress tests are released late Thursday.

The tests, which will be made public at 5 pm ET, were designed to gauge whether any of the nation's 19 largest banks would need more capital to survive a deeper recession.

Much of the results already began leaking out on Wednesday. Financial stocks initially rallied after the early results didn't appear to be as bad as investors feared. But the rally lost steam on Thursday even after Fed Chairman Ben Bernanke's comments that the stress tests should restore investor confidence in the banks.

Wells Fargo, Citigroup and Bank of America all need billions more, regulators have told them.

Citigroup will need to raise about $5 billion, according to a government official briefed on the results who spoke to the AP on the condition of anonymity because he was not authorized to discuss the matter. Earlier news reports had put that dollar figure closer to $10 billion.

Regions Financial will also need to raise more money, according to people briefed on the results, as will Bank of America and Wells Fargo.

Bank of America stock rose Wednesday after reports that the Charlotte, N.C.-based company would need to collect $34 billion in additional capital. The New York Times and Wall Street Journal reported the figure.

Wells Fargo needs between $13 billion and $15 billion, according to Times and Journal reports Thursday.

GMAC, the lending arm of beleaguered automaker General Motors, is said to need $11.5 billion.

Morgan Stanley is looking at between a $1 billion and $2 billion shortfall, according to the Times.

In all, the Journal said at least seven of the banks will need a combined $65 billion. The entire group that is deemed to need more capital will require less than $100 billion combined, according to the Times.

Despite being included in the Journal's tally, State Street is not being required to raise more capital after completing its stress test, a person familiar with the matter said Thursday.

The public nature of the assessments and Thursday's planned announcement raised questions among some critics about whether the findings will reflect the banks' actual conditions.

The tests put banks through two scenarios: one that reflected expectations about the current recession and another that envisioned a recession deeper than what analysts predict.

Stress tests have long been a part of the bank regulation system. They help regulators decide how to supervise banks and aid banks in deciding how to limit their risk. But those conversations between banks and regulators normally take place behind closed doors.

In recent weeks, the government's unprecedented decision to publicly release bank-test results has fanned speculation, with analysts predicting the findings and investors staking out trading positions.

Critics are concerned that all the attention could make the tests much less effective.

They say regulators seem so intent on maintaining public confidence in the banks that the results will have to say the banks are basically healthy. Officials have said they will not let any of the 19 institutions fold.

That makes it almost impossible for them to say anything about a bank that would threaten its survival, since a flight by investors could force the government to step in with additional bailout money—something the Treasury Department hopes to avoid.

"There is a real question as to the legitimacy of these results," said Jason O'Donnell, senior analyst at Boenning & Scattergood.

The stress tests are a key part of the Obama administration's plan to stabilize the financial industry. The tests estimated how much value the banks' loans would lose as consumers and businesses faced more trouble repaying loans.

The first test scenario envisioned unemployment reaching 8.8 percent in 2010 and housing prices dropping another 14 percent this year. The second imagined unemployment rising to 10.3 percent next year and homes losing another 22 percent of their value this year.

But economic assumptions have changed since the tests were designed in February.

Unemployment already has surpassed the 8.4 percent the test's first scenario predicts for 2009, which leaves some analysts wondering whether the tests were harsh enough.

The government is asking banks to keep their capital reserve ratios above a certain level so they can continue lending even if the economic picture darkens.

The banks that need more capital will have until June 8 to come up with a plan to raise the additional resources and have the plan approved by their regulators, officials said Wednesday.

Banks will have several options for increasing their capital. Some will be able to close the gap by converting the government's debt into common stock. Others will have six months to attempt to raise money from private investors.

If they cannot do it, the government will provide money from its $700 billion financial system bailout.

Representatives for American Express, JPMorgan Chase, Bank of New York Mellon, Citigroup and Regions Financial would not comment on the tests.

The remaining stress-tested banks are: Goldman Sachs Group, MetLife, PNC Financial Services Group, U.S. Bancorp, SunTrust Banks, Capital One Financial, BB&T, Regions Financial, Fifth Third Bancorp and Keycorp.

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