The drip drip drip of stress test rumors is disconcerting, and I am perplexed at the logic. I could have seen leaks early on, to box the banks in, particularly since the markets are insisting on rallying on what ought to be bad news (and if you think the bank capital raises are over, I have a bridge I’d like to sell you).
Wells having to go to the well (no pun intended) was predictable, given that they have loudly protested the stress tests from the get-go. However, we’ve seen a reversal of the initial party line that few banks would be able asked to boost equity levels. For instance, I can’t recall any early reports predicting that Morgan Stanley would be required to bolster its balance sheet (not that I think it isn’t necessary, given my expectation of further writedowns, but that it doesn’t appear to have been anticipated).
Citi has reportedly gotten the authorities to lower the amount it has to raise from $10 billion to $5 or $6 based on pending asset sales. But those also reduce earnings power and depending on the book value versus the sale price of the businesses, may increase liquidity without actually increasing net worth. I must confess to not knowing the performance of the units on the block, but distressed sellers typically wind up selling their best assets (Lehman in its attempt to monetize its asset management business at the 11th hour was a classic case). Citi is obviously assuming it fares better than AIG did on this front.
From the Wall Street Journal:
Results of the government’s stress tests of the nation’s largest 19 banks started to trickle out Wednesday, highlighting the burgeoning gaps between the industry’s strong and weak players.
Among the institutions that have been instructed by the Federal Reserve to raise more capital are Wells Fargo & Co., Morgan Stanley, GMAC, State Street Corp., Bank of America Corp., Citigroup Inc. and Regions Financial Corp., according to people familiar with the matter. The banks with the biggest capital deficiencies are Bank of America, with a $34 billion hole; Wells Fargo, which needs to raise $15 billion; and GMAC, which faces a $11.5 billion shortfall, the people said.
Healthy banks that don’t need fatter capital cushions include American Express Co., Bank of New York Mellon Corp., Capital One Financial Corp., Goldman Sachs Group Inc., MetLife and J.P. Morgan Chase & Co., other people said.
Investors on Wednesday were eagerly awaiting word of the test results at several large regional banks, including KeyCorp, Fifth Third Bancorp, BB&T Corp., PNC Financial Services Group Inc. and SunTrust Banks Inc…
However, the Federal Reserve has instructed Citigroup to raise $5 billion to $6 billion in additional capital as part of the recently completed stress tests.
The capital hole is considerably smaller than what Fed officials had initially identified. The shrinking gap reflects Citigroup’s successful efforts to persuade the Fed to give it credit for some of its pending capital-raising initiatives, according to people familiar with the matter.
Citigroup executives believe they’ll be able to plug the hole by continuing to sell assets and by expanding the company’s planned conversion of preferred shares into common stock to include a wider range of securities, these people said. Citigroup, which has received $50 billion in taxpayer capital and soon will count the U.S. government as its largest shareholder, won’t need to get additional financial aid from Washington, these people said.
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Slightly OT, but wouldn’t it be ironic if TPTB convert taxpayer-owned preferreds to common to make it easier for banks to raise capital (because of the liquidation preference of the preferreds) while only last week, our head honcho was ignoring the liquidation preference for Chrysler’s secured debt holders?
Citigroup executives believe they’ll be able to plug the hole by continuing to sell assets and by expanding the company’s planned conversion of preferred shares into common stock to include a wider range of securities, these people said. Citigroup, which has received $50 billion in taxpayer capital and soon will count the U.S. government as its largest shareholder, won’t need to get additional financial aid from Washington, these people said.…
That sounds like a lot more than $5 billion dollars to me. Makes one wonder if CitiGroup is actually short $30+ billion and ‘only’ has to raise ‘$5 billion more’ provided all its other capital raising plans come through…
No point speculating too far at this point though, we’ll have our answer in 24 hours or so.
Slightly OT, but wouldn’t it be ironic if TPTB convert taxpayer-owned preferreds to common to make it easier for banks to raise capital (because of the liquidation preference of the preferreds) while only last week, our head honcho was ignoring the liquidation preference for Chrysler’s secured debt holders?.
?
Theres a huge key difference here. With Chrysler the goal of the secured bond holders was essentially to wipe out:
*The shareholders
*The preferred holders
*The junior debt
*The pension holdings
etc…
While at the same time retaining most of their debt and getting a great deal of equity. That was, at least, their original offer.
Basically, they were effectively demanding that the government’s loans and pension guarantees be used as leverage to bail them out.
I’m not surprised the ‘head honcho’ disagreed. Any decent public leader would have.
With the banks its another issue. Citigroup isn’t insisting, at this point anyway, that the US government get ‘wiped out’ to protect its senior holders. If and when it does, things may get a lot more interesting.
I must seriously not understand liquidation preference.
THESE RESULTS SHOULD SCARE THE HELL OUT OF ALL OF US!
Think about it Wells Fargo & Co., Morgan Stanley, GMAC, State Street Corp., Bank of America Corp., Citigroup Inc. and Regions Financial Corp all have to raise billions more after the government's Stress-less Test?
That is INSANE considering;
1.) Mark to Myth Accounting was used.
2.) No Off Ballance Sheet Liabilities were counted.
3.) Worse case Eco assumptions used have already been surpassed.
AND THEY STILL FAILED!
According to Bloomberg, the requirement for Morgan Stanley to raise additional capital stems from it acquiring Smith Barney from Citi. So it seems that they’re not really giving MS a smack on the wrist at all…which was to be expected.
I agree. It makes no sense that the market hurded up. I made the mistake and shorted BAC. I sit at $11.09. I am taking the perverbial “Bath”. For May 7th and continuing I do not know how to trade this mistake. I am wondering if I should sit tight to see if there is a pull back.
I understand that there is a bull snarl in the works as the market has passed it first resistance of 8000 and on its way to the 8500 resistance. Thereafter it will continue to test the 200 to the 9000.
I hope that the Friday news is negative on emplyment so that I move out withour ER attention. Does anyone have a suggestion.
Theres a huge key difference here. With Chrysler the goal of the secured bond holders was essentially to wipe out:
*The shareholders
*The preferred holders
*The junior debt
*The pension holdings
etc…You mean, the senior secured debt holders were exercising their contractual rights to be paid first in the event of bankruptcy? How absurd.
The net effect will be: Secured debt issuance is no longer an option for large companies, because no one believes that the debt is truly secured.
Carmen said:… I hope that the Friday news is negative on emplyment so that I move out withour ER attention. Does anyone have a suggestion.
at Carmen:
get rid of your short, and do not short again.
If it leads you to hope for negative news on employment, i.e. even more people having lost their jobs than already expected, than surely something is horribly wrong!
Carol you are absolutely right. That was not the smart thought.