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Bank of America, Citigroup, GMAC Need More Capital (Update2)
By Rebecca Christie
May 6 (Bloomberg) -- Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and GMAC LLC are among the companies judged to need additional capital according to results of regulators’ stress tests on the 19 largest U.S. banks.
Bank of America has the biggest shortfall, at $34 billion, according to people familiar with the matter. Citigroup’s requirement for deeper reserves to offset potential losses over the coming two years is about $5 billion, people with knowledge of that bank’s results said. Wells Fargo requires about $15 billion, while GMAC’s need is $11.5 billion, one person said.
Goldman Sachs Group Inc., Morgan Stanley, MetLife Inc., JPMorgan Chase & Co., Bank of New York Mellon Corp. and American Express Co. were deemed not to need additional funds, the results show.
Stocks rallied after the news, sending the Standard & Poor’s 500 Financials Index to its highest level in four months. The results are the culmination of weeks of investigations, led by the Federal Reserve, into the banks’ lending practices, funding strategies and securities and loan portfolios.
“The markets are telling us we’re in a recovery and the banks are beginning to heal,” William Isaac, former chairman of the Federal Deposit Insurance Corp., said in an interview today. The end of the stress tests after “three months of water torture” is providing investors some relief, he said.
Common Equity
The regulators put an emphasis in their reviews on tangible common equity. Citigroup’s assessment reflects the New York- based bank’s previously announced plan to convert some of its preferred shares into common stock.
Spokespeople for all of the 10 banks declined to comment.
The S&P 500 Financials Index rose 5.9 percent as of 3:39 p.m. in New York. The broader S&P 500 Stock Index was up 1 percent at 913.22.
“For the most part, the results being leaked are better than what was anticipated,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. Investors are “surprised at names like MetLife and Morgan Stanley don’t need to raise more capital” and “the fact that Citigroup only has to do $5 billion more,”he said.
Banks’ Strategies
For firms judged to have additional capital needs, regulators have detailed options including conversions of preferred shares, asset sales and raising new funds from private investors. Lenders may outline their strategies to add capital, or in other cases buy out government stakes, after tomorrow’s official release of the results.
Should the banks needing bigger capital buffers opt to convert the Treasury’s preferred shares, the government will have a bigger ownership stake. Officials may set limits on those companies’ dividends and political lobbying.
While it’s unlikely to influence day-to-day operations, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Fed Chairman Ben S. Bernanke told lawmakers yesterday.
“It’s obviously not our intention or desire to have long- term government ownership of banks,” Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a “few years” before banks can end their dependence on government capital.
Wells Fargo
Wells Fargo, the fourth-largest U.S. bank by assets, requires about $15 billion, a person familiar with the matter said. The San Francisco-based bank got $25 billion in taxpayer funds last year. Wells Fargo spokeswoman Julia Tunis Bernard declined to comment.
The bank’s shares have dropped 13 percent since it acquired Wachovia Corp. in December. Investors have been concerned that losses in Wachovia’s $482 billion loan book, which includes $118 billion of option adjustable-rate mortgages, will hurt Wells Fargo’s balance sheet and erode capital.
In accordance with accounting rules, Wells Fargo took initial writedowns on $37.2 billion of Wachovia’s troubled loans.
Chairman Richard Kovacevich in March called the administration’s stress-testing program “asinine” and Berkshire Hathaway Inc. Chairman Warren Buffett, whose company is Wells Fargo’s biggest shareholder, said May 3 that Wells Fargo didn’t need any more capital.
Issuing Debt
Banks that want to return money injected by the Treasury since October must show they can borrow from private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter. The Treasury may unveil conditions for repaying funds to its $700 billion Troubled Asset Relief Program as soon as today, they said.
JPMorgan, Goldman Sachs and Bank of New York Mellon have each sold debt without FDIC guarantees in the past month. Bank of New York Mellon said proceeds from its May 5 sale will be used to help repay the $3 billion capital injection it got from the TARP last year.
“Going forward, we just need banks be able to issue debt without the FDIC backing -- that’s the next stage for these bank names in terms of evaluating their health,” said Bronzo at Security Global Investors.
People familiar with the matter said May 4 that about 10 of the 19 firms will be deemed to need additional capital. The number increased from six to eight a week ago after regulators boosted their target for the reserves the firms must hold.
Financial Yardstick
Officials favor tangible common equity equal to about 4 percent of a bank’s assets, up from an earlier target of 3 percent, people with knowledge of the deliberations said last week. The financial yardstick strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions - - and preferred stock, including shares issued to the Treasury.
Bank of America’s capital shortfall is the biggest among the 19 banks, people familiar with the matter said yesterday. Spokesman Scott Silvestri in Charlotte, North Carolina, declined to comment. Analysts’ estimates of the company’s shortage of common equity have ranged from zero to as much as $100 billion.
Chief Executive Officer Kenneth D. Lewis, 62, was ousted as chairman on April 29 after shareholders rebelled against management’s handling of the Merrill Lynch & Co. takeover.
Bank of America is considering selling part of its stake in China Construction Bank Corp. immediately instead of in a few weeks, the Financial Times reported.
Citigroup’s Steps
While Citigroup has received the biggest rescue so far among commercial banks, it has taken steps in recent weeks to bolster its capital. The New York-based company plans to get a $2.5 billion boost to tangible common equity from selling brokerage and investment banking units in Japan. It’s also pushing to complete a venture with Morgan Stanley ahead of schedule to lock in a $5.8 billion gain, people familiar with the matter said.
Citigroup spokesman Stephen Cohen declined to comment.
JPMorgan Chief Executive Officer Jamie Dimon said April 16 that he could repay the New York-based firm’s $25 billion in taxpayer funds “tomorrow” and referred to the money as “a scarlet letter.” Repayment would free the company from compensation restrictions and other oversight.
JPMorgan spokesman Joseph Evangelisti in New York declined to comment.
MetLife, the largest U.S. life insurer, parted ways with its biggest rivals by not seeking funds from the TARP.
American Express Co., the biggest U.S. credit-card company by purchases, beat analysts’ profit estimates and said April 23 that it intends to repay the government’s rescue-fund investment.
Morgan Stanley converted to a bank in September to gain access to financing from the Fed after Lehman Brothers Holdings Inc. went bankrupt, damaging investor confidence in securities firms. In October the company raised $9 billion in cash by selling a 21 percent stake to Japan’s Mitsubishi UFJ Financial Group Inc. and got $10 billion investment in TARP money.
The company has slashed leverage and assets on its balance sheet and scaled back risky activities like principal investing and proprietary trading. It cut its dividend 81 percent last month to 5 cents.
To contact the reporter on this story: Rebecca Christie in Washington at [email protected]
Last Updated: May 6, 2009 16:03 EDT
Lo sviluppo e il lancio delle notizie relative allo stress test è stato un capolavoro mediatico, massimo rispetto a chi ha gestito tutto ciò....
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Taleb told the conference organized by Bank of America-Merrill Lynch. “They had in the 1930s. Today they have no control.” 
