*WASHINGTON (MarketWatch) -- Federal regulators released the long-anticipated, controversial stress tests on the health of the 19 largest financial institutions on Thursday, showing that the banking sector is secure, but under a pessimistic forecast, banks' credit losses over the next two years could be $600 billion. * According to the report, 10 institutions are ordered to raise $74.6 billion in private capital over the next seven months, slightly more than expected from unofficial reports on the test results. Two of the institutions -- Wells Fargo and Morgan Stanley -- have already announced plans to raise capital.
'These examinations were not tests of solvency; we knew already that all these institutions meet regulatory capital standards.' — Fed Chairman Ben Bernanke The bulk of losses based on the adverse economic scenario considered by bank regulators would come from residential mortgages and consumer-related loans. According to the tests, roughly $455 billion would come from residential and consumer related losses. Losses from trading divisions and investment portfolios could reach $135 billion, based on the Federal Reserve's adverse forecast. Treasury Secretary Timothy Geithner indicated that banks have enough high-quality, "Tier 1" capital for now, but that credit losses will continue across asset classes. He pointed out that Tier 1 capital at these banks totaled about $835 billion in the fourth quarter, 2008. However, he added that could change. "Banks will need strong capital to weather these losses while making loans," Geithner said. If the adverse scenario plays out, with much higher unemployment and loss of wealth in housing markets, total loan losses could hit 9.1% of total outstanding loans, a worse loss rate than banks suffered at the height of the Great Depression in 1931-32. Nevertheless, the report shows that the 19 banks held only $200 billion in mortgage- securities that were not backed by Fannie Mae or Freddie Mac. Only a portion of these assets were in "riskier non-prime mortgages," considered a key contributor to launching the global financial crisis. However, the report did not indicate how many assets were in this riskier category. Geithner said the stress tests are a "one time" exercise. He said bank regulators will continue to use existing capital requirements for banks. Both Geithner and Fed Chairman Ben Bernanke reiterated that based on their evaluation of the banks, they believed all 19 banks are well-capitalized for now. "These examinations were not tests of solvency; we knew already that all these institutions meet regulatory capital standards," said Fed Chairman Ben Bernanke. "The results released today should provide considerable comfort to investors and the public." Bernanke said he believed that many of the 19 institutions are well positioned to raise private capital over the next six months. It is expected that the banks that need to raise private capital will seek to do so first by selling shares to private investors. Other methods involve selling assets, such as mutual fund divisions, and by seeking to convert holdings by bondholders and private preferred shareholders into common shares. [image: Chart of JPM]<http://www.marketwatch.com/tools/quotes/intchart.asp?symb=JPM> Some banks may eventually need to convert government preferred shares into common shares and possibly receive further capital injections from the $109.6 billion left in the bank bailout fund. Regulatory observers argue that Congress is not ready to allocate more taxpayer money to the fund, raising questions about whether the Treasury Department has enough capital to provide banks should a downturn occur. Nevertheless, Bernanke said the government is ready to provide further capital if needed. "The government stands ready to provide whatever additional capital may be necessary to ensure that our banking system is able to navigate a challenging economic downturn," Bernanke said. The results According to the results of the tests, Bank of America must raise $34 billion, Wells Fargo & Co. (WFC <http://www.marketwatch.com/quotes//wfc>:Wells Fargo & Co STT <http://www.marketwatch.com/tools/quotes/quotes.asp?symb=STT> 37.83, -1.30, -3.3%) did not need to raise capital. Banks that need to raise capital have until June 8 to provide a plan. After that they have six months, until Nov. 9, to raise the capital. How to raise capital Having some of the big banks sell assets would not only meet the government goal of having these banks raise more capital, it also would fit with the regulatory goal of reducing the size of financial institutions many policymakers believe are "too big to fail." Only if they are unable to raise the capital to cover the shortfall by November, will they start working with bank regulators to convert government preferred stakes into common shares. The Treasury bought $125 billion in preferred shares in the 19 institutions in October and later bought billions more in preferred shares in some of the banks. "Converting government preferred shares into common shares is a last resort," said Nancy Bush, director of NAB Research LLC. "They don't want to see the government convert its preferred stake into common because it will mean the government will have greater control over the banks." However, Geithner indicated that the government has no plans to exert influence at any corporation where it takes a large common equity stake. "Where Treasury does take common equity, we will seek to return the company to purely private ownership as quickly as possible, and will be guided by the basic principle that the best way to serve the interest of shareholders and taxpayers is to exert our influence only on core governance issues and not on day-by-day operations," Geithner said. Dwight Smith, partner at Alston & Bird LLP in Washington, argues that asset sales, private investors and conversion of government preferred shares may not be enough for some of the banks that need to raise capital. He argues that the Treasury may need to provide further taxpayer-funded capital injections from the remainder of the $700 billion bank bailout package. Roughly $109.6 billion remains in that fund. "After six months you may see some of that money [bank bailout package] used," Smith said. However, Smith argues that the stress test gives investors clarity about what sort of risks they have with investing in banks. He expects a number of investors to allocate funds to some of the troubled institutions because they are cheaper. "The stress test suggests that a bottom has been hit or will be hit shortly," Smith said. He added that many banks will succeed at selling assets but that they will have more success raising capital by attracting private investors. "The effect on capital or selling assets can be marginal, and even the best case is substantially less than if you can raise private capital directly," he said. Invest with caution Even thought the results don't appear to be as negative as some critics had anticipated, regulatory observers argue that investors and bondholders should be cautious before investing in financial institutions that need to raise capital. "Investors would be foolish to purchase any common stock or bonds in a bank requiring additional capital if any uncertainty emerges about the bank's ability to raise all the new capital from private sources," said University of Maryland Professor Peter Morici. "No one should want to own shares in a bank with even the prospect of partial government ownership," he said. [image: End of Story] Abhishek Kothari ------------------------------ Cricket on your mind? Visit the ultimate cricket website. Enter now! -- Thanks & Regards, Abhishek Kothari --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
