U.S. regulators told top banks on Thursday to raise $74.6 billion to build a capital cushion officials hope will restore faith in financial firms and set a course out of the deepest recession in decades.
Within minutes of release of the bank stress test results, which showed smaller capital needs than once feared, several of the 10 firms needing capital immediately issued statements detailing how they planned to raise it.
Bank of America Inc, which accounted for almost half of the total capital shortfall with $33.9 billion to be raised, said it planned to sell assets, issue $17 billion in common stock, and take other steps to fill the hole.
We're going to be watching carefully to make sure they give us credible plans for raising capital and becoming privately owned again, Federal Reserve Chairman Ben Bernanke said at a news briefing, referring to the entire group and not just Bank of America.
The examinations, which involved more than 150 regulatory officials poring over the books of the 19 largest firms, effectively drew a line between healthy and weak, and quantified exactly how much those institutions struggling under the weight of souring loans must raise.
U.S. stock index futures edged higher after the test results calmed fears that the government would have to play an even bigger role on Wall Street. Many of the banks themselves are loath to take more government aid for fear of the scrutiny it may bring and tough conditions on executive compensation.
Several of the banks found to be adequately capitalized said they wanted to repay taxpayer money as soon as possible to get out from under the government yoke.
MIXED VIEWS ON CREDIBILITY
The relatively modest size of the hole discovered by regulators carrying out the tests, which were based on an adverse economic scenario, led to both applause from investors who believe the worst is over and skepticism among those who think the examination wasn't rigorous enough.
The fears of nationalization or of failure have more or less disappeared, and now what we're getting is details of how banks are going to fill in their capital deficiencies, said Eric Kuby, chief investment officer at North Star Investment Management in Chicago.
The doubters believe the banks will need much more of a capital cushion than stipulated by the regulators, as the U.S. jobless rate soars and the housing market and economy takes time to pull out of a funk, driving up credit losses.
I'm a skeptic. I don't see this as a genuine audit. They have been playing the marketing game strongly lately, said Robert Andres, president of Andres Capital Management in Philadelphia.
The President, (Treasury Secretary Timothy) Geithner and Bernanke, they are trying to build the momentum of confidence. They are kicking the can down the road to stall for time.
As for the banks themselves, at least two viewed the government's assumptions as surprisingly gloomy. Wells Fargo said it did not get enough credit for its expected revenue over the coming quarters, calling the Federal Reserve's estimates excessively conservative, and Citigroup Inc also said it expected to earn more revenue than the government forecast.
The reviews, led by the Federal Reserve, were designed to gauge how the 19 banks would fare if the recession worsened.
Bank of America was found to have the largest capital need. However, it said it did not need any more government money. Some or all of its $17 billion of new common stock may be issued in exchange for privately held preferred shares, of which it has about $30 billion.
Wells Fargo was found to need $13.7 billion, auto and home loan finance company GMAC $11.5 billion, and Citigroup Inc $5.5 billion.
U.S. President Barack Obama's administration hopes the firms can fill the capital holes from private sources, although Bernanke said the government stands ready to provide whatever additional capital may be necessary to ensure that our banking system is able to navigate a challenging economic downturn.
Several of the banks found to be in need of bigger buffers rushed to explain how they intend to raise the capital. Citigroup said it was seeking to exchange $5.5 billion in additional preferred securities for common stock to fill its shortfall.
The surprise is not the size of the shortfalls, but the fact that the banks are immediately out there in the market trying to raise capital to cover the losses, said Andrew Busch at BMO Capital in Chicago. And they may be right. After this rally, this could be the best moment to do it.
The banks that have been told to build their capital cushion have until June 8 to develop a detailed plan and November 9 to implement it.
Regulators had to walk a fine line as they sought to convince skeptical investors the reviews were sufficiently rigorous without unduly straining banks that were already in a precarious financial position.
The total figure appeared to be small enough to ensure that the White House would not have to approach Congress for more rescue money on top of the $700 billion approved last year -- a request that would likely be turned down because of voter outrage over the bailouts.
The tests found that total credit losses for the 19 banks may reach $600 billion in 2009 and 2010. All told, if the economy performs as badly as the worst case scenario used in the stress test, the 19 banks' losses would mount to $950 billion from mid-2007 through 2010.
Banks may cover any capital shortfalls through a mixture of asset sales, share sales, and perhaps the conversion of preferred shares into common stock. Regulators have put special emphasis on holding common capital rather than preferred because stock investors view common as the best form of capital.
For many banks, converting government owned preferred shares into common could turn the U.S. into the company's biggest shareholder.
(Reporting by Karey Wutkowski and David Lawder; Additional reporting by Christian Plumb, Elinor Comlay, Jonathan Stempel, Paritosh Bansal, Ellis Mnyandu, Dan Wilchins, Ryan Vlastelica and Jennifer Ablan in New York, and Mark Felsenthal, Glenn Somerville, Emily Kaiser and Jeff Mason in Washington; writing by Emily Kaiser; editing by Tim Ahmann and Toni Reinhold.)