U.S. Pledges Capital for Banks as Stress Tests Begin
By Rebecca Christie
Feb. 23 (Bloomberg) -- U.S. financial regulators pledged to inject additional funds into the nation’s major banks to prevent their collapse and will this week begin examinations to determine if they have enough capital.
“The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth,” the regulators said in a joint statement in Washington today. “The U.S. government stands firmly behind the banking system during this period of financial strain.”
Citigroup Inc. and Bank of America Corp. jumped after the announcement after investors last week questioned their viability in face of surging credit losses. Coming after the Treasury already bought more than $280 billion worth of stakes in U.S. financial companies, it also indicates the government could end up with overt control of some firms, analysts said.
“The goal here is to incrementally provide as much support as necessary,” up to what could be called “temporary nationalization,” said Kevin Petrasic, a former official at the Office of Thrift Supervision, who is now a lawyer at the Paul, Hastings, Janofsky & Walker law firm in Washington. “Call it what you will, the effort is really intended to make sure that the system remains strong and healthy.”
Common Equity
Banks that cannot privately raise the additional capital they need after the so-called stress tests will get taxpayer money, the regulators said. Government funds would be in the form of “mandatory convertible preferred shares” that would be exchanged into common equity “only as needed over time.”
Stakes that the Treasury has already bought in lenders will also be eligible to be changed to convertible preferred shares.
Officials are open to considering requests to exchange existing stakes into common equity shares if the bank and its regulator believes it would help it survive, Treasury spokesman Isaac Baker said late yesterday.
Citigroup plunged 44 percent last week on concern it can’t keep going without some form of nationalization that hurts shareholders. It jumped 12 percent to $2.20 as of 9:40 a.m. in New York.
The new government funds are designed to provide a “temporary” buffer for firms against increased losses during the crisis, regulators said. The statement was a joint release of the Treasury, Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision.
Stress Tests Begin
Supervisors will start the stress tests on Feb. 25 to assess whether banks have enough capital to withstand “a more challenging economic environment.”
U.S. business economists in a survey today projected that the country’s recession will be the worst in more than three decades as job losses mount and consumers and companies retrench.
The world’s largest economy will shrink by 1.9 percent this year and a total of 2.8 percent in the current downturn, the most since the 1973-75 slump, according to the median estimate in a poll taken by the National Association for Business Economics. Another 3.2 million Americans will be cut from payrolls in 2009, pushing unemployment to 9 percent by year-end, NABE said.
Bank shares have been hammered as the economic slump deepens. The Standard & Poor’s 500 Banks Index has lost 58 percent since the start of the year.
Nationalization Proposal
The declines have helped give momentum to the idea of nationalizing banks in recent weeks. Nouriel Roubini, the economist and professor at New York University’s Stern School of Business, Republican Senator Lindsey Graham of South Carolina and former Federal Reserve Chairman Alan Greenspan have all suggested it as a solution to banks’ woes.
Senate Banking Committee Chairman Christopher Dodd said in a Feb. 20 interview with Bloomberg Television that “short-term” government takeovers may be unavoidable.
By converting its preferred shares to common, the government could pad too-thin tangible common equity, or TCE, ratios. TCE strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the U.S. Treasury. The ratio measures TCE against tangible assets.
The government holds $52 billion of preferred shares in Citigroup, five times the bank’s market value as of Feb. 20. If the U.S. were to convert all of its holdings into common shares, it would own more than 80 percent of the company.
Bank of America
Charlotte, North Carolina-based Bank of America, which has received $45 billion in TARP funds in exchange for preferred shares and warrants, would be 66 percent owned by the government if its entire stake were converted to common equity, according to data compiled by KBW Inc., a New York-based investment bank.
The figure would be 69 percent at Regions Financial Corp. in Birmingham, Alabama, which has received $3.5 billion from the U.S. It would be 83 percent at Fifth Third Bancorp, the largest Ohio-based lender, which got $3.4 billion.
KBW calculated the government stakes based on a conversion price of 80 percent of the stock’s value as of Feb. 5.
Bank of America, Citigroup and Wells Fargo & Co. in San Francisco are among more than 400 financial institutions that have received cash in exchange for preferred shares under the program.
The regulators today said major U.S. banks are currently meeting their existing capital requirements.
“Major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized,” the regulators said. “This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging.”
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