Stress Tests Show Many Big Banks Strong

WASHINGTON (AP) - Government exams of the nation's biggest banks
have helped lift a cloud of uncertainty that has hung over the

The so-called stress tests - a key Obama administration effort
to boost confidence in the financial system - showed nine of the 19
biggest banks have enough capital to withstand a deeper recession.
Ten must raise a total of $75 billion in new capital to withstand
possible future losses.

"The publication of the stress tests simply cleared the air of
uncertainty," said Allen Sinai, chief global economist at Decision
Economics. "The results were not scary at all."

He said it will take a long time for the banks to resume normal
lending. But the test results didn't alter his prediction that
economy is headed for a recovery in October or November.

A key indicator of economic health will be released Friday
morning, when the government announces how many more jobs were lost in April and how high the unemployment rate rose.

The stress tests have been criticized as a confidence-building
exercise whose relatively rosy outcome was inevitable. But the
information, which leaked out all week, was enough to cheer
investors. They pushed bank stocks higher Wednesday, and rallied
again in after-hours trading late Thursday once the results had
been released.

Among the 10 banks that need to raise more capital, Bank of
America Corp. needs by far the most - $33.9 billion. Wells Fargo &
Co. needs $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc.
$5.5 billion and Morgan Stanley $1.8 billion.

The five other firms found to need more of a capital cushion are
all regional banks - Regions Financial Corp. of Birmingham, Ala.;
SunTrust Banks Inc. of Atlanta; KeyCorp of Cleveland; Fifth Third
Bancorp of Cincinnati; and PNC Financial Services Group Inc. of

The banks will have until June 8 to develop a plan and have it
approved by their regulators. If they can't raise the money on
their own, the government said it's prepared to dip further into
its bailout fund.

The stress tests are a big part of the Obama administration's
plan to fortify the financial system. As home prices fell and
foreclosures increased, banks took huge hits on mortgages and
mortgage-related securities they were holding.

The government hopes the stress tests will restore investors'
confidence that not all banks are weak, and that even those that
are can be strengthened. They have said none of the banks will be
allowed to fail.

Among the banks that the government did not ask to raise more
capital were JPMorgan Chase & Co., brokerage house Goldman Sachs
Group Inc., insurer MetLife Inc. and credit card companies Capital
One Financial Corp. and American Express Co.

Together, the 19 firms that took the test hold two-thirds of the
assets and half the loans in the U.S. banking system.

Wells Fargo and Morgan Stanley said they'll try to raise
billions in fresh capital. Meanwhile, American Express became the
first major financial institution to formally request permission to
return federal bailout money provided under the Troubled Asset
Relief Program, or TARP.

Separately, Citigroup said it's planning to convert an extra
$5.5 billion of preferred shares - a kind of debt - into common
stock after the stress tests determined it needs an equal amount in
fresh capital.

GMAC said it will raise the $11.5 billion mandated by the
Treasury within six months, a task that could involve the federal
government taking a big stake in the auto finance company.

The Treasury lent GMAC $5 billion from the Troubled Asset Relief
Program in December after granting the company's request to become
a bank. In exchange, the government received preferred stock. In a
statement Thursday, GMAC said one option for raising the capital
was for it to convert "existing equity into a form of Tier 1
common equity."

GMAC, which reported a first-quarter loss of $675 million, said
earlier this week it has seen rising defaults in its auto finance
division. That, combined with soured assets in its Residential
Capital LLC mortgage unit, makes it more difficult for the company
to raise the additional capital in the public markets.

The tests found that if the recession were to worsen, losses at
the 19 stress-tested firms during 2009 and 2010 could total $600
billion. Of those losses, $185.5 billion would be from mortgages,
$82.4 billion from credit card loans and $53 billion from
commercial real estate loans - the loans on banks' books that
analysts say are now most vulnerable to default.

"Looking at the big picture, you can say that things aren't so
bad for the financial industry as a whole," said Kevin Logan,
chief U.S. economist at Dresdner Kleinwort.

But Logan said attracting fresh capital will be a challenge for
banks that need it.

"The banking industry is not going to make a lot of money going
forward, and that's a dilemma for keeping banks solvent and getting
them lending," he said.

Large and regional bank stocks mostly rallied in after-hours
trading as investors showed relief over the results. Bank of
America rose 9.2 percent to $14.75, while JPMorgan gained 1.5
percent to $35.77. Fifth Third Bancorp advanced 23.4 percent to
$6.60, while Boston's State Street Corp. jumped to $40.90, a gain
of 8.1 percent.

The government's unprecedented decision to publicly release bank
exams has led some critics to question whether the findings are
credible. Some said regulators seemed so intent on sustaining
public confidence in the banks that the results would have to find
the banks basically healthy, even if some need to raise more

Jaidev Iyer, a former risk management chief at Citigroup, said
regulators are playing to public expectations, which could put the
government in the role of creating "winners and losers." Because
the government has said it won't let any firm fold, taxpayers may
wind up on the hook.

"If there is in fact no appetite to let losers fail, then the
real losers are the market at large, the government and the
taxpayers," Iyer said.

In the tests, the Fed put banks through a scenario that imagines
how they would fare if the recession worsened. It imagined that
joblessness would hit 10.3 percent next year and house prices would
fall more than 22 percent.

Some analysts have questioned whether the tests were rigorous
enough. For example, economists expect the jobless rate to approach
or exceed 10 percent by year's end - and to go higher next year -
even if the recession doesn't worsen.

A steeper downturn would make it harder for consumers and
businesses to repay loans, which would cause banks' assets to lose
value. The government is forcing the banks to keep their capital
reserves up so they can keep lending even if the economic picture

The tests measured bank reserves based on what's known as common
equity, the value of a company's common stock and profits. Some of
the banks have big enough reserves by traditional measures but fall
short by this narrower standard.

"It's not really stressful, so how could it be a stress test?"
said Simon Johnson, a former chief economist with the International
Monetary Fund and professor at the Massachusetts Institute of
Technology. "This makes it seem like we're not having a financial
crisis at all."

Johnson said some bank executives have told him they already are
losing more money on commercial real estate loans than the tests
estimated even under the harsher economic scenario.

The stock market has cheered the results, he said, because the
message is that the government will continue supporting the banks
no matter what it costs.

Another criticism of the stress tests is that they failed to
address a key problem confronting banks: The troubled mortgage
assets on their books are making it hard for them to resume normal

Banks that need capital have several options. Some would be able
to close the gap by converting the government's debt into common

"These tests will help ensure that banks have a sufficient
capital cushion to continue lending in a more adverse economic
scenario," said Treasury Secretary Timothy Geithner. "They will
provide the transparency necessary for individuals and markets to
judge the strength of the banking system."

Describing the purpose of the tests, Federal Reserve Chairman
Ben Bernanke said at a news conference with Geithner, "This is to
make sure banks have enough capital to offset the losses we know
are coming in the next couple of years."

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