Stress test results lift cloud of uncertainty

May 8, 2009

Results show 10 big banks need $75 billion in new capital; hope rises for economy’s recovery

Daniel Wagner and Jeannine Aversa, AP Business Writers
Friday May 8, 2009, 1:09 am EDT

WASHINGTON (AP) — Government exams of the biggest U.S. banks have helped lift a cloud of uncertainty that has hung over the economy.

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. (BAC) needs by far the most — $33.9 billion. Wells Fargo & Co. (WFC) needs $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc. (C) $5.5 billion and Morgan Stanley (MS) $1.8 billion.

The five other firms found to need more of a capital cushion are all regional banks — Regions Financial Corp. (RF) of Birmingham, Alabama; SunTrust Banks Inc. (STI) of Atlanta; KeyCorp (KEY) of Cleveland; Fifth Third Bancorp (FITB) of Cincinnati; and PNC Financial Services Group Inc. (PNC) of Pittsburgh.

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.

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Wall Street’s credit crisis heads into second year

June 18, 2008

Wednesday June 18, 3:59 pm ET
By Joe Bel Bruno, AP Business Writer

More credit losses seen costing global banks $1 trillion as credit crisis hits second year

NEW YORK (AP) — There are new signs that the worst of the global credit crisis is yet to come, and that banks and brokerages caught up in the market turmoil may lose $1 trillion by the time it has passed.

Major U.S. investment banks this week announced yet another painful quarter amid the implosion of mortgage-backed securities and risky credit investments. Regional banks have scrambled to secure fresh capital to stay in business, and by Wednesday there was new talk that embattled investment bank Lehman Brothers might be forced into a sale.

With each passing quarter, Wall Street’s top bankers have indicated that the worst of the market turmoil was over — only to face more pain months later. The uncertainty has caused already battered investors to lose confidence in financial companies, and expectations have increased that more layoffs, asset sales and capital raising will be needed in the weeks ahead.

“We thought this was going to be the kitchen-sink quarter, and we’re finding out that CEOs and CFOs still don’t have a handle on the credit crisis,” said William Rutherford, a former state treasurer of Oregon who now runs Rutherford Investment Management. “We haven’t disinterred all the dead bodies. What else is out there?”

The deepening credit crisis could cost the global financial system some $945 billion by the time it is over, according to a report from the International Monetary Fund. So far, banks and brokerages have written down nearly $300 billion from bad bets on mortgage-backed securities and other risky investments.

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