USA: 2 Banks Cited in Stress Tests Find Ready Investors

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By GRAHAM BOWLEY

Published: May 8, 2009

A day after federal regulators ordered 10 of the nation’s biggest banks to raise a total of $75 billion in extra capital, the first of them, Wells Fargo and Morgan Stanley, each tapped the markets for $7.5 billion on Friday to provide themselves with capital cushions and satisfy the regulators’ concerns.

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Results of the Bank Stress Tests

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Federal Reserve Bank Stress Test Overview

The results of the stress tests on 19 major banks, released by the Obama administration on Thursday, were far more positive than many in the industry had feared when the tests were first unveiled in February. Nevertheless, they created an immediate pressure on 10 banks to demonstrate they could raise new capital.

Wells Fargo and Morgan Stanley both seemed to answer questions about the banks’ ability to do so, at least for now and at least for some banks.

Amid a growing optimism about the future of the financial sector and the economy, the stock market moved higher on Friday, with the Standard & Poor’s 500-stock index trading up 1.9 percent by the afternoon.

Wells Fargo sold $7.5 billion of common stock. The regulators had asked the bank to raise $6 billion. Morgan Stanley raised $7.5 billion by selling both stocks and bonds, up from the $5 billion it said Thursday that it would raise and more than the $1.8 billion the regulators had required the bank to find.

The stress tests painted a broad canvas of the 19 banks, their health and their capital needs. Bank of America was judged one of the weaker institutions, with a need to raise about $34 billion in equity capital. The bank hopes to raise half of that by selling common stock and converting preferred shares to common stock.

All 10 banks must give regulators their plans for raising the money by June 8 and raise it by November.

Citigroup, which for many has come to stand for the problems plaguing the financial industry, was told by regulators that it must raise $5.5 billion, in addition to its recent efforts to raise capital by selling businesses and converting just over half of the $45 billion of its preferred stock held by the government into common stock.

Citi’s chief executive, Vikram S. Pandit, said he would expand the bank’s offer to exchange preferred shares of stock for common stock to a broader assortment of private investors.

Meredith A. Whitney, a prominent banking analyst, said even if the stress tests results had removed the possibility of failure among the biggest banks, they did not eliminate several more quarters of expected poor financial results. And even then, she said, some of the banks would not be attractive growth companies.

“Banks are not going to make a lot of money from credit cards,” she said. “Banks have not made a lot of money from originating and holding mortgages on their balance sheets, and the revenue environment is very different.”

She said that even if all the banks secured more capital, they still might not lend, holding back the economy.

The stress tests estimated how much each bank would lose if the economic downturn proved even deeper than currently expected: under the worst-case assumptions, with an unemployment rate of 10.3 percent, the losses by the 19 banks could total a startling $600 billion this year.

Economic date on Friday showed the American economy lost a further 539,000 jobs in April and the unemployment rate leapt to 8.9 percent — a sign that the United States may already heading toward the worse-case scenario. although the job losses were less than Wall Street had been expecting.

Some analysts are now saying that even this more adverse scenario may turn out to be too optimistic. The adverse scenario assumed a 3.3 percent decline in the nation’s gross domestic product in 2009, but the gross domestic product contracted by 6.1 percent in the first quarter.

"The 6.1 percent annualized decline in first-quarter G.D.P. means that the economy could easily shrink by more than 3.3 percent this year," Paul Ashworth, a senior United States economist for Capital Economics, wrote in a client note. The implication of all this, some analysts say, is that the stress tests may have been too lenient.

Given this, attention is now turning to the thousands of smaller banks beyond the largest 19 elsewhere in the country and whether they will be able to survive any deterioration in economic conditions.

Eric Dash and Catherine Rampell contributed reporting