The government released its much-anticipated and much-leaked bad-bank, good-bank report today. Ten banks will need to raise nearly $75 billion. But don’t panic: Fed Chairman Ben Bernanke was careful to frame the stress test as a “what if” scenario so as not to shock the markets, which fell today after rallying earlier this week.
“These examinations were not tests of solvency; we knew already that all these institutions meet regulatory capital standards,” Bernanke said. “Rather, the assessment program was a forward-looking, ‘what-if’ exercise intended to help supervisors gauge the extent of the additional capital buffer necessary to keep these institutions strongly capitalized and lending, even if the economy performs worse than expected between now and the end of next year.”
For details, readers may want to peruse the Federal Reserve’s own overview of results. Of course, there are any number of wire reports to read, such as this Bloomberg round up. Highlights: Morgan Stanley only needs to raise $1.8 billion in common equity. MS says that it will seek to raise $2 billion in “anticipation of the firm’s closing of the Smith Barney joint venture.” It has “commenced” a public offering, it said. The firm further said it intends to repay TARP as quickly as possible. Citi, the Fed says, needs only $5.5 billion. Well Fargo will sell $6 billion in stock to shore up its common equity position; it has a $13.7 billion deficit in common equity, the government says.
Bank of America says it may sell assets, such as its mutual fund arm Columbia Management, which lost $459 million in 2008 and sucked up millions to prop up its money market funds.
While some say this shows that the banks are not insolvent and can withstand worst-case economic scenarios, Bernstein analyst Brad Hintz reckons that the top 19 TARP recipients could need as much as $175 billion in additional capital. Treasury says it only has $110 billion left unallocated TARP funds, with perhaps $25 billion more in expected TARP repayments this year. “There is reasonable disagreement about how undercapitalized the banking system might be,” Hintz wrote in note to investors this afternoon. “Although Treasury believes it has enough TARP funds remaining to rescue banks, we note that it is unclear where additional funds will come from if Treasury’s projection proves wrong, since Congress appears resistant to the idea of using tax payer to fund another round of TARP.”