In Battle With Fed, Banks Won
Sat May 9, 2009 4:10am
By sara.behunek - The Big Money
Details surrounding the bank stress tests continues to make headlines, with the Wall Street Journal and the Financial Times leading with how the U.S. government has, and will continue, to make concessions to the banks. According to the WSJ, the Federal Reserve’s initial estimate of capital deficits was much larger than the $75 billion or so reported Thursday. But the agency, toeing a fine line between trying to restore confidence with the tests while also maintaining its credibility, finally agreed to scale back some of the findings "following two weeks of intense negotiations." A senior executive at one of the banks actually described the early numbers as “mind-numbing,” while another detailed Bank of America’s (BAC) reaction to a more than $50 billion capital hole as “shocked.” Eventually, BofA’s capital deficit was pegged at $33.9 billion, which, according to a bank spokesperson, was reached through an “adjustment for first-quarter results and errors made by regulators in their analysis” and not as a result of lobbying.
Other large concessions include Wells Fargo (WFC), whose capital hole was shrunk to $13.7 billion from $17.3 billion, and Citigroup (C), which was instructed to raise $5.5 billion, down from an initial estimate of $35 billion. Fifth Third Bancorp (FITB), SunTrust Banks (STI), and PNC Financial Services Group (PNC) also saw reductions.
The FT says that behind closed doors, the government has assured banks they will be allowed to raise less than mandated by the stress tests “if earnings over the next six months outstrip regulators’ forecasts.” In addition to the obvious result (having to raise less money), the news could also give banks incentive to “book profits” in the next half-year, the paper points out.
Already, Wells Fargo and Morgan Stanley (MS) have raised billions of dollars in the capital markets—a number the FT estimates at $11.5 billion—and BofA has “hastily” laid out plans to sell stock, the New York Times reports. It writes: “The speed and ease with which the banks swung into action, combined with a surge in financial shares, was hailed as a sign that confidence was returning to the financial industry. The sales seemed to put to rest questions about whether big banks would be able to lure private investors, rather than have to turn to the government again.”
Bigger news for the Times, however, is job losses, which found a place on the front page. The Labor Department reported Friday that another 539,000 jobs were shed in April, and the unemployment rate leapt to 8.9 percent, its highest level since 1983. Sounds dreadful, “yet the deterioration was milder than expected, prompting encouraging talk,” the paper says. Ethan Harris, one of the chiefs of United States economic research at Barclays Capital, said the data, compounded with the stress test results, were “a confirmation that we’re in the early stages of a turn.” Clipping hope’s wings is Bloomberg, which says “the jobless rate probably won’t start retreating until an economic recovery is secured, and the loss in wages will hold back consumer spending for months.” In March, payrolls fell by 699,000. The economy has lost 5.7 million jobs since payrolls started dropping in January 2008.
U.S. stocks closed the week on a strong note as a reaction to better-than-expected jobs data and assurances that banks were sound. The Nasdaq climbed “like it was 1999,” Reuters reports, with the index capping a nine-week advance, the longest stretch of weekly gains in a decade. The Nasdaq Composite Index climbed 22.76 points, or 1.33 percent, to 1,739. The Dow Jones industrial average gained 164.80 points, or 1.96 percent, to 8,574.65. The Standard & Poor's 500 Index rose 21.84 points, or 2.41 percent, to 929.23. Since hitting a 12-year closing low in March, the S&P has surged 37.4 percent, but it is still down 40 percent from its record of October 2007, Reuters says.
Not all was good news on Friday, however: Berkshire Hathaway (BRK.A) and Toyota Motor Corp. (TM) posted record quarterly losses, Reuters reports. The net loss for the Warren Buffett’s Omaha, Neb.-based insurance-and-investment company was $1.53 billion, or $990 per Class A share, and marks the first quarterly loss since 2001. Last year, Berkshire had a first-quarter profit of $940 million ($607 per Class A share). The results can largely be blamed on losses from derivative contracts, a big investment in the oil company ConocoPhillips, and the weakening economy, according to Reuters.
Meanwhile, Toyota reported a $7.74 billion fiscal fourth-quarter net loss, “leading the world's largest auto maker to its first annual loss in 59 years and setting the stage for a deep loss this year,” the WSJ reports in a story that tops the paper’s Money & Investing section. The article continues: “The quarterly loss was the company's biggest ever and one of the largest on record by a Japanese manufacturer. Its dour outlook for this fiscal year signals that Toyota's troubles in China, where it missed the growing demand for smaller cars, and in the U.S., where a costly push into full-size pickup trucks collided with economic slowdown, won't soon allow it to capitalize on Detroit's woes.”
reuters.com |
