Thursday 7 May 2009

Stressful times for the banks...

Greg Morcroft of MarketWatch, wrote the following story:

Shares of the country's largest banks rose Wednesday as details emerging about stress test results looked better than expected.
Bank of America confirmed in a published report that a government checkup determined the company needs an additional $34 billion in tangible common equity, and that those needs can be covered by converting existing government investments into common stock. That's less than analysts and investors had been predicting the bank might need.

Bank of America and the others will have various options in raising new capital, including converting current preferred shares held by the government to common stock, as Citigroup has already agreed to do, or by selling assets or securities.

Further aiding bank gains, another report indicated that the tests have determined American Express will not need new capital. The government holds $25 billion of convertible preferred shares of J.P. Morgan Chase, while it has invested about $3.4 billion in American Express.
Wells Fargo & Co will need about $15 billion in capital following a U.S. government-led stress test, Bloomberg reported. Wells currently holds $25 billion of capital from the government, which it got in exchange for preferred shares under the TARP plan.
Bloomberg also reported that Citigroup would need about $5 billion of new capital. The federal government has already invested $45 billion in Bank of America but that investment was in preferred shares and doesn't count toward the type of capital regulators are testing major U.S. institutions for. According to the reports, the bank could convert the preferred into common shares, and the new common stock would count toward the required capital. That would, according to the reports, preclude the need for a new investment from the government.
Bank of America shares, a component of the Dow Jones Industrial Average, traded 10% in the pre-open but recovered and were up about 12% by afternoon at $12.13.
"It is conceivable that Bank of America could convert its existing preferred stock, and put the capital issue behind it assuming the economy does not take another significant leg down," Citigroup analysts said in a research report Wednesday.
However, such a conversion would create its own new problem-- namely, making the U.S. government one of the bank's largest shareholders and diluting the stakes of existing shareholders. "Our analysis shows dilution could range from as low as 20% to as high as 35%," the Citigroup analysts said of Bank of America.
The New York Times report cited J. Steele Alpin, Bank of America's chief administrative officer, as saying, "We're not happy about it because it's still a big number. We think it should be a bit less at the end of the day." Some analysts had expected Bank of America to need up to $70 billion of fresh capital.

On a related note, banks that want to return money received under Washington's Troubled Asset Relief Program will have to show that they can borrow funds without government guarantees, making it less attractive for some to free themselves from the government's clutches, The Wall Street Journal reported late Tuesday.
Some banks are keen to return the TARP funds, partly because of the strict conditions they place on executive compensation, dividend payments and stock buybacks imposed after the investments were made in the wake of the September financial crisis. However, regulators want to make sure that banks are financially strong enough to keep lending before allowing them to return the money.

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