Fed Is Said to Seek Capital for at Least Six Banks After Tests

By Robert Schmidt and Rebecca Christie
April 29 (Bloomberg) -- At least six of the 19 largest U.S.
banks require additional capital, according to preliminary
results of government stress tests, people briefed on the matter
said.
While some of the lenders may need extra cash injections
from the government, most of the capital is likely to come from
converting preferred shares to common equity, the people said.
The Federal Reserve is now hearing appeals from banks, including
Citigroup Inc. and Bank of America Corp., that regulators have
determined need more of a cushion against losses, they added.
By pushing conversions, rather than federal assistance, the
government would allow banks to shore themselves up without the
political taint that has soured both Wall Street and Congress on
the bailouts. The risk is that, along with diluting existing
shareholders, the government action won’t seem strong enough.
“The challenge that policy makers will confront is that
more will be needed and it’s not clear they have the resources
currently in place or the political capability to deliver
more,” said David Greenlaw, the chief financial economist at
Morgan Stanley, one of the 19 banks that are being tested, in
New York.
Final results of the tests are due to be released next week.
The banking agencies overseeing the reviews and the Treasury are
still debating how much of the information to disclose. Fed
Chairman Ben S. Bernanke, Treasury Secretary Timothy Geithner
and other regulators are scheduled to meet this week to discuss
the tests.

Options for Capital

Geithner has said that banks can add capital by a variety
of ways, including converting government-held preferred shares
dating from capital injections made last year, raising private
funds or getting more taxpayer cash. With regulators putting an
emphasis on common equity in their stress tests, converting
privately held preferred shares is another option.
Firms that receive exceptional assistance could face
stiffer government controls, including the firing of executives
or board members, the Treasury chief has warned.
Today, Kenneth Lewis, chief executive officer of Bank of
America, faces a shareholder vote on whether he should be re-
elected as the company’s chairman of the board. While Lewis has
been at the helm, the bank has received $45 billion in
government aid.

‘Out of Our Hands’

Scott Silvestri, a spokesman for Charlotte, North Carolina-
based Bank of America, declined to comment on Lewis yesterday.
Lewis said earlier this month that the firm “absolutely”
doesn’t need more capital, while adding that the decision on
whether to convert the U.S.’s previous investments into common
equity is “now out of our hands.”
Citigroup, in a statement, said the bank’s “regulatory
capital base is strong, and we have previously announced our
intention to conduct an exchange offer that will significantly
improve our tangible common ratios.”
Along with Bank of America and New York-based Citigroup,
some regional banks are likely to need additional capital,
analysts have said.
SunTrust Banks Inc., KeyCorp, and Regions Financial Corp.
are the banks that are most likely to require additional capital,
according to an April 24 analysis by Morgan Stanley.
By taking the less onerous path of converting preferred
shares, the Treasury is husbanding the diminishing resources
from the $700 billion bailout passed by Congress last October.

‘Politically Constrained’

“Does that indicate that’s what the regulators actually
believe, or is it that they felt politically constrained from
doing much more than that?” said Douglas Elliott, a former
investment banker who is now a fellow at the Brookings
Institution in Washington.
Geithner said April 21 that $109.6 billion of TARP funds
remain, or $134.6 billion including expected repayments in the
coming year. Lawmakers have warned repeatedly not to expect
approval of any request for additional money.
Some forecasts predict much greater losses are still on the
horizon for the financial system. The International Monetary
Fund calculates global losses tied to bad loans and securitized
assets may reach $4.1 trillion next year.
Geithner has said repeatedly that the “vast majority” of
U.S. banks have more capital than regulatory guidelines indicate.
The stress tests are designed to ensure that firms have enough
reserves to weather a deeper economic downturn and sustain
lending to consumers and businesses.

‘Thawing’ Markets

He also said there are signs of “thawing” in credit
markets and some indication that confidence is beginning to
return. His remarks reflected an improvement in earnings in
several lenders’ results for the first quarter, and a reduction
in benchmark lending rates this month.
Financial shares are poised for their first back-to-back
monthly gain since September 2007. The Standard & Poor’s 500
Financials Index has climbed 18 percent this month, while still
73 percent below the high reached in May 2007.
Finance ministers and central bankers who met in Washington
last weekend singled out banks’ impaired balance sheets as the
biggest threat to a sustainable recovery. Geithner has crafted a
plan to finance purchases of as much as $1 trillion in
distressed loans and securities. Germany has proposed removing
$1.1 trillion in toxic assets.