Regulators are ordering some of the largest U.S. banks to find tens of billions of dollars of capital to cushion themselves in the event of a deep economic downturn.
About half of the 19 largest U.S. banks are expected to need more capital once the results of government stress tests of their ability to weather a deep recession are released Thursday at 5 p.m. EDT.
While the reported capital shortfalls so far are much larger than analysts expected, bank shares soared as investors got more clarity over how well the industry will cope with perhaps the most severe recession since World War II.
Among banks needing capital, Bank of America Corp
The market likes the certainty of putting numbers on the worst-case scenarios of how much capital these banks need, said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California.
Regulators have told Bank of America it needs $34 billion of capital, while Citigroup needs $5 billion and the auto and mortgage lender GMAC LLC
Citigroup's amount reflects its previously announced plan to convert some preferred shares into common stock. The various sources were not authorized to speak because the official stress test results are not public.
Wells Fargo needs $15 billion, Morgan Stanley
Bank of New York Mellon Corp
All the companies declined to comment. In an interview on PBS' Charlie Rose Show, U.S. Treasury Secretary Timothy Geithner said none of the 19 banks are at risk of insolvency. He also said the government does now want to get involved in day-to-day management at the banks.
Banks may cover any capital shortfalls through a mixture of asset sales, share sales and perhaps the conversion of the preferred shares into common stock.
The government is giving banks needing capital one month to develop a plan to raise it and until November 9 to finish the job. These banks must also review their managements and board of directors to ensure proper leadership.
Banks needing capital may ask the government to issue more preferred shares, or to swap government preferred shares into convertible preferred shares. They cannot repay aid from the Troubled Asset Relief Program until they issue debt not backed by the federal government, and for more than a five-year term.
Calling the new capital a one-time buffer, the government pledged to stand firmly behind the banking system during this period of financial strain to ensure it can perform its key function of providing credit to households and businesses.
The tests are a key element of the Obama administration plan to stabilize lenders. The White House will await them before commenting on potential management changes at banks, spokesman Robert Gibbs said.
Federal Deposit Insurance Corp Chairman Sheila Bair said the results should be confidence instilling.
If banks convert preferred shares issued under TARP, the government could become one of their biggest shareholders.
Citigroup analyst Keith Horowitz wrote that banks, other than his own, may need to raise $75 billion after the tests.
Analysts believe other banks that may need capital include Fifth Third Bancorp
PRESSURE ON BANK OF AMERICA CEO
Bank of America's stress test results are certain to increase pressure on Chief Executive Kenneth Lewis, who was ousted as chairman last week in a shareholder vote.
That ouster could also lay the groundwork for his departure from his employer of 40 years, including the last eight as CEO. The largest U.S. bank has already received $45 billion of government help.
Lewis told analysts on April 20 that we absolutely don't think we need additional capital but added: Make no doubt about it, credit is bad, and we believe credit is going to get worse.
Critics fault Lewis for not backing away in December from the Merrill merger or disclosing Merrill's failing health.
The bank might raise capital by converting some of its $30 billion of privately held preferred shares into common stock, or by selling its stakes in China Construction Bank Corp <601939.SS><0939.HK> and Brazil's Itau Unibanco
It might also sell its Columbia asset management unit, and has said it may sell its First Republic Bank business.
WELLS FARGO, CITIGROUP, GMAC
Wells Fargo opposed taking its initial $25 billion of government aid and did not get government help in buying Wachovia Corp for $12.5 billion at year-end.
Chairman Dick Kovacevich in March called the government tests asinine. Billionaire investor Warren Buffett, whose Berkshire Hathaway Inc
But analysts have said Wells Fargo may need a greater cushion against loan losses, despite its having taken a big writedown when it bought Wachovia.
Citigroup's capital need would be at the low end of the $5 billion to $10 billion it had been expected to require.
The bank is preparing an exchange offer that could leave the government with a 36 percent equity stake.
GMAC, meanwhile, has been struggling with rising auto and mortgage losses, as well as falling vehicle sales at its former parent, General Motors Corp
(Reporting by Karey Wutkowski and Jonathan Stempel; Additional reporting by Paritosh Bansal, Elinor Comlay and Dan Wilchins in New York; Mark Felsenthal, David Lawder and Jeff Mason in Washington, D.C.; Douwe Miedema in London; and Michael Flaherty and Parvathy Ullatil in Hong Kong; Editing by Richard Chang and Andre Grenon)