Banks May Get Mix of U.S. Stock Conversions, Private Funding
http://www.bloomberg.com/apps/news?pid=20601087&sid=afdcZEesYddk&refer=home#
By Robert Schmidt and Rebecca Christie
April 22 (Bloomberg) --
Treasury Secretary Timothy Geithner indicated that stress tests will show most of the 19 biggest U.S. banks have enough capital and said those requiring further funds may get a mix of converted government preference shares and private money.
The Treasury chief, testifying at a congressional oversight panel yesterday, said each bank needing aid after the tests gauging their health would work with supervisors on the options, including tapping the $700 billion Troubled Asset Relief Program. Geithner also repeatedly stated that regulators -- not the Treasury -- are taking the lead on the exams.
The remarks helped ease investors’ concerns about the results of the reviews, including the risk of political interference and the prospect for widespread stock dilutions among the 19 banks under scrutiny.
Financial shares jumped, sending benchmark indexes up the most in almost two weeks.
“Geithner wouldn’t have said what he said” at the hearing “if he were really concerned about the outcome” of the tests, said
Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Investors recognize that there’s less of a headwind in terms of stock prices.”
The Standard & Poor’s 500 Index added 2.1 percent to 850.08 yesterday, the biggest gain since April 9.
Citigroup Inc.,
JPMorgan Chase & Co. and
Bank of America Corp., all of which have taken federal bailout money, climbed at least 9 percent.
Test Results
Banks may get preliminary results from the tests on April 24, the same day the Federal Reserve is expected to release the methodology of the assessments, people briefed on the matter have said. While final results are scheduled for May 4, regulators have yet to agree on how they will be published.
In their reviews, the regulators will also determine when the healthiest banks can pay the government back, Geithner said. Included in that decision will be ensuring that there’s sufficient capital in the system to foster an economic recovery, he added.
“Where there is a need for additional capital, total capital and common capital, then those banks will have a series of options for how they meet that need, and they’ll work out with their primary supervisors what’s the best mix of those options,” the secretary said.
By converting exiting government preference shares to common equity, a bank would cut its interest payments to the Treasury, bolstering its capital.
Aim of Tests
The Federal Reserve is leading the assessments, which are designed to ensure that firms have enough capital to weather a deeper economic downturn over the coming two years.
In his prepared statement for yesterday’s oversight hearing in Washington,
Geithner said “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”
Kirk Hartman, who helps oversee about $400 billion as chief investment officer at Wells Capital Management in Minneapolis, said: “We need to see more details on this, but those are constructive comments.”
Geithner also said there were signs of “thawing” in credit markets and some indication that confidence was beginning to return.
Even amid some improvement, he warned that bank reports show “significant declines” in commercial and industrial lending and consumer loans such as credit cards. Also, credit costs remain high, even if they recently have declined somewhat, he said.
Loan Quality
Regulators conducting the stress tests are increasingly focusing on the quality of loans banks made after finding wide variations in underwriting standards, a regulatory official said earlier this week. They concluded that banks’ lending practices need to be given as much weight as macroeconomic scenarios in determining the health of each bank, the person said.
Banks have to estimate two-year losses of as much as 8.5 percent on mortgages under the stress-test scenario where the unemployment rate is seen reaching 10.3 percent in 2010, the Wall Street Journal reported. The loss for credit-card portfolios is calculated at 20 percent and for commercial real- estate loans 12 percent, the paper said, citing a document the Fed submitted to banks in February.
At yesterday’s hearing, committee members were skeptical of the Treasury’s strategy for the bailout and questioned whether Geithner was doing enough to protect taxpayers.
“The public and this panel have a right to know how Treasury defines success,” said Representative
Jeb Hensarling, a Texas Republican. “For many it is difficult to discern.”
TARP Creep
Hensarling said he was particularly concerned about the potential for nationalizing banks and about the expansion of a program that was conceived to help the financial industry but is now also aiding automakers and their suppliers.
“Is there any firm that is beyond the reach for taxpayer bailout assistance?” he asked. “At what point does Starbucks get in line?”
Geithner offered new details yesterday on the government’s plans for rules on executive pay for firms that have received taxpayer aid.
The administration intends in coming weeks to release guidelines on compensation limits. The new regulations will be effective immediately, while there will be a 60-day comment period.
“We will engage in a thorough review of this issue,” Geithner said. “I anticipate that we will look for ways to orient compensation towards long-term performance.”
Geithner separately said he’s not worried about low initial interest in the Fed’s Term Asset-Backed Securities Loan Facility, an effort with the Treasury to fund the purchase of as much as $1 trillion in consumer and business loans. He said participation has been “relatively good for an early program.”
Still, the Treasury secretary warned the panel that lawmakers’ efforts to revise the terms of the bailout and place additional restrictions on companies is hampering the program. For investors “to be willing to take risk alongside the government, they need to have some confidence in the rules of the game,” he said.