After subjecting the nation’s biggest banks to the most public scrutiny in decades, federal regulators ordered 10 of them on Thursday to raise a total of $75 billion in extra capital and gave the rest a clean bill of health. The long-awaited results of the “stress tests” set off an immediate scramble by major institutions for more capital. By June 8, they must give regulators their plans for raising the money, and raise it by November.
The verdict was far more upbeat than many in the industry had feared when the tests were first announced in February. And the banks that came up short will have to raise much less than some analysts had expected as recently as a few days ago.
The stress tests were aimed at estimating how much each bank would lose if the economic downturn proved even deeper than currently expected. But regulators gave the banks a break by letting them bolster their capital with unusually strong first-quarter profits and also by letting them predict modest profits even if the economy again turns down.
Despite an almost tangible sense of relief among the banks and investors, the report card is unlikely to silence an intense debate over whether the Treasury Department and the Federal Reserve let the banks off too easily and glossed over their problems.
Under the worst-case assumptions — an unemployment rate of 10.3 percent next year, an economic contraction of 3.3 percent this year and a 22 percent further decline in housing prices — the losses by the 19 banks could total $600 billion this year and next, or 9.1 percent of the banks’ total loans, regulators concluded. That rate of loss would be higher than any other since 1921.
But while the adverse situation was supposed to be unlikely, it is not that much worse than what has happened so far. Unemployment hit 8.5 percent in April and could top 9 percent as early as Friday, when the Labor Department releases its employment report for May.
Bank of America was told it would have to come up with $33.9 billion. Wells Fargo will have to find $13.7 billion. And Citigroup will have to produce another $5.5 billion, on top of the $52.5 billion that it had planned to acquire by letting the Treasury become its biggest single shareholder as part of a broader deal.
Industry executives reacted with jubilation, as if they had proved their critics wrong and passed the tests with flying colors.
“The results off the stress tests should put to rest the harmful speculation we have seen over the past few months,” declared Edward L. Yingling, president of the American Bankers Association, hours before the results were even made public.
Investors, who had already bid up share prices of the big banks in reaction to leaks about the results earlier this week, reacted with relief.
Regulators and bank executives alike predicted that most of the institutions would be able to build up the necessary capital from private sources — either by selling off assets or by converting shares of preferred stock into ordinary stock.
“With the clarity that today’s announcement will bring, we hope banks are going to get back to the business of banking,” Timothy F. Geithner, the Treasury secretary, said Thursday.
Wells Fargo immediately announced that it would raise $6 billion through a new stock offering. Morgan Stanley, which was told to raise $1.8 billion, announced plans for a $2 billion stock offering.
GMAC, the financing arm of General Motors, will need to find $11.5 billion in capital. Last week the government gave GMAC more federal funds after it agreed to be the lender for purchasers of Chrysler vehicles while Chrysler is under bankruptcy protection. Earlier this year, the Treasury Department supplied the company with $5 billion through its Troubled Asset Relief Program.
Regulators did not push for the ouster of any chief executives, or demand any specific board shake-ups. They also said they would not subject the rest of the nation’s banks to similar stress tests or require them to have additional capital buffers.
But Treasury and Fed officials said they would press banks to improve their governance and would reserve the right to demand changes in management for banks that need substantial additional help from taxpayers.
Indeed, Bank of America is expected to announce that it will start recruiting fresh board members in a bid to strengthen oversight over its management.
Despite the reassuring picture outlined by Mr. Geithner and the chairman of the Federal Reserve, Ben S. Bernanke, the stress test results hardly silenced critics who have warned that the tests would amount to a whitewash.
“It’s window-dressing,” said Bert Ely, a longtime bank analyst based in Alexandria, Va. Mr. Ely was particularly skeptical about letting companies bolster their balance sheets by converting preferred shares to common.
“That won’t add one extra dollar to a bank’s capital buffer against losses,” Mr. Ely complained. “It’s just moving capital from one place to another.”
From the start, Treasury and Fed officials have steered between what Mr. Bernanke recently described as “Scylla and Charybdis” — being perceived as too easy and too coddling of banks on the one hand, or so tough and antagonistic that investors and consumers alike become even more anxious.
But the big question, which remains unanswered, is whether Mr. Geithner and Mr. Bernanke will in fact confront banks over their risk management practices in a way that regulators have been afraid to do for years, or whether regulators will simply revert to business as usual once the crisis eases.
Officials also disclosed detailed estimates of potential losses at individual banks, concluding that losses could skyrocket at institutions with particularly risky loan portfolios. At Wells Fargo, which was a major subprime mortgage lender during the housing boom, regulators estimated that losses on first mortgages would hit almost 12 percent of its loan portfolio if the adverse situation proved correct. At Morgan Stanley, regulators estimated, loss rates from commercial real estate loans could potentially exceed 40 percent.
But analysts increasingly agree that the economic outlook has brightened considerably in the last month or so. A wide array of recent indicators, from consumer spending and consumer confidence to home sales and credit conditions, now suggest that the economy is stabilizing and that a fragile recovery will begin later this year.
Mr. Geithner and top White House officials worked carefully to manage public expectations and avoid the kind of scathing reaction that greeted the Treasury’s first big announcement in February of plans to rescue the banking system.
Unlike in February, when both Mr. Geithner and President Obama raised expectations in advance, then unveiled only vague concepts, Mr. Geithner took much of the surprise out of the results by emphasizing early on that all the big banks were solvent. The only question, he said over and over, was whether they had enough capital to withstand a downturn that was even worse than the one already under way.
In addition, Treasury and Fed officials remained tranquil as most of the results dribbled out through leaks before the official disclosure. As a result, the results seemed almost anticlimactic when they finally became public.
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