Stress Testes of Steel

I cannot explain how much I love that headline, and how hard I’m going to work to make it relevant.  So the stress test results [.pdf] came out yesterday, and revealed that, while none of the banks are currently considered insolvent, several of them could go that way if the government’s “more adverse” scenario of unemployment hitting 10.3% comes to pass.  So they’re asking 11 bank-holding companies to raise capital to meet their preferred “cushion” level.  Here’s the summary of who needs what, in billions, as per the Wall Street Journal’s colorful front page:

Bank of America: $33.9
Wells Fargo: $13.7
Citigroup: $5.5
GMAC: $11.5
Regions Financial: $2.5
SunTrust: $2.2
KeyCorp: $1.8
Fifth Third: $1.1
PNC Financia: $l .6
Morgan Stanley: $1.8
J.P. Morgan Chase, BB&T, Capital One, US Bancorp, MetLife, Goldman Sachs, Bank of NY Mellon, American Express, and State Street: $0
Having six months to raise new, private capital: Priceless.

Let me highlight the surprises:

• Wells Fargo needs quite a bit of funding to be adequately cushioned against any further decline in the economy.  The predictions for Wells are already being called overly optimistic by some, because Wells — like several of the passing institutions — is heavily invested in real estate that may go further south than the government’s prediction.  
• Capital One is not on the needy list — let’s hope credit card defaults don’t surpass the government’s more adverse scenario numbers (18-20% losses).
• The Citi number seems low — until you realize that they need to raise $5.5 billion IN ADDITION to the $45 billion from the government that they just converted to common stock and the $3.4 billion it just sold Nikko for.  So put them down for $50 billion and change.
• GMAC suuuuucks.  I’ve got another post on that one coming later, though.

So, what do you do, the day after the government tells everyone that you aren’t sufficiently capitalized to survive a 1.4 percent rise in unemployment?  If you’re Wells Fargo and Morgan Stanley, well, you use that encouraging news to raise $7.5 billion each today:

In the capital-raising exercises, Wells Fargo sold $7.5 billion of common stock; regulators had ruled it needs to fill a capital hole of $13.7 billion.

Morgan Stanley raised $8 billion by selling $4 billion in common stock and $4 billion in bonds. It increased the total amount it raised compared with its initial plans by $3 billion because of strong investor demand, it said. Regulators had declared that the investment bank needed to raise money to fill a $1.8 billion hole.

Here’s my question — who bought those public offerings?  Friends of Bernie Madoff?  The Morgan Stanley results show that 45% of their expected loan losses are in Commercial Real Estate Loans, a category in which we aren’t even close to the bottom of the market — but their overall.  They did, however, manage to raise $6.5 billion last quarter, and their overall exposure to bad parts of the market is much slimmer than most.

But how bad did people think this was going to be that the news that Wells Fargo’s adverse-case-scenario losses will be $89.6 billion made Wall Street happy?  Shares were up 3.4 today (13.8 percent) on the news.  What?

I’m glad that there’s private capital to be found to shore up these banks, because it does mean that less government money will be needed.  But the sheer, amazing balls of these guys, to use a report of “it’s not as bad as we thought!” to raise billions of dollars — it certainly reminds us that nothing’s really changed on Wall Street in terms of risky behavior.

Ten Banks Expected to “Fail” Stress Tests

It’s Stress Test Week!  (Again).  But this time, we’re talking results instead of just, you know, hey, guess what’s happening behind closed doors.  The nation’s 19 largest banks have all seen their results by now, and rumors have been flying since Monday about what, exactly, those results showed.  I thought I’d do a round-up of expectations now, and then come back tomorrow and see how the banks fared in reality.  I’ve waxed on about what the tests mean before.  And I’ve said my faith in Treasury rests largely on the results.  So here it is: judgment day.  Rumor has it, ten banks aren’t expected to pass (which is different than a bank failing outright, because if they don’t pass, they’re given time to raise capital).  Here’s the Top Ten:

Citibank is held by Citigroup.  It’s expected to need a major infusion of cash — talk is $10 billion.  Citi apparently appealed the government’s findings.  Just this week, it sold its Japanese finance company, Nikko Cordial, for about $3.4 billion (it bought Nikko in 2008 for around $18B) to raise some much-needed cash.  Citi is largely considered the bell-weather of this test, in that if it’s deemed to “pass,” the rest of the test should be considered a joke.
Current government investment in Citi: ~$45 billion (some in common stock).

Bank of America is the nation’s largest retail bank, as of last fall when it bought Merrill Lynch — and is also expected to be the bank in the most trouble, since last fall it — hey! — bought Merrill Lynch.  BoA is expected to need a whopping $33.9 billion in additional capital post-test.
Current TARP investment in BoA: ~$45 billion (unless you count the government’s asset guarantees in.  Then we’re talking 45 + $142 billion = $187 billion).

Wells Fargo was considered in prime shape this fall when it bought out troubled Wachovia, and it took money from the TARP — but only under duress.  Now, despite the CEO’s protests that the stress tests are “asinine,” the bank is considered one of the most likely to be under pressure to raise new capital.  Warren Buffet, whose Berkshire Hathaway investment group owns shares of Wells Fargo (and US Bancorp, SunTrust, and BoA) and pushed for the Wachovia takeover, called Wells and US Bancorp “extremely strong banks” Monday.
Current TARP investment: ~$25 billion.

KeyCorp owns the Key Bank franchises.  It’s considered to be widely and heavily exposed in the commerical real-estate market, which is taking some significant hits as businesses suffer during the recession.  Analysts at several research/investment firms have said KeyCorp is quite likely to need to raise additional capital, and it has shown a loss in all of the last four quarters.
Current TARP investment: ~$2.5 billion

Regions Financial is in about the same boat as KeyCorp.  Oppenheimer analysts said late last month that they expected Regions to fail the stress tests and have to raise more capital.  Regions posted a 92% loss in the first quarter.  Holy mackeral.
Current TARP investment: ~$2.5 Billion

US Bancorp owns U.S. Bank, the sixth largest commercial bank in the country.  It’s not widely expected to need a big capital raise; it cut dividends earlier this year by 88 percent to maintain its capital cushion.  Its CEO also announced late last month that US Bancorp is ready to repay its TARP money as soon as possible.  The bank had a $529 million profit in the first quarter, down significantly from past years but a better showing than expected.
Current TARP investment: $6.6 billion

Fifth Third Bancorp is another regional bank expected to need additional capital.  It’s based in Florida, where the burst of the housing bubble is still taking down everything in its path.  Like Regions, were the government to convert its preferred shares to common shares, it would own a majority stake (54 percent) of Fifth Third.  One wonders if that’s enough ownership to induce a name change.
Current TARP investment: $3.4 billion

Like Fifth Third, Georgia-based SunTrust is a considered a regional bank likely to be told to get thee more capital, according to a report issued by Mogan Stanley last month.  Then again, Morgan Stanley though BoA fell into a “grey zone” and might not need new capital, so who knows. SunTrust wrote off $610 million in bad loans just in the first quarter this year, and apparently holds a big balance sheet of home mortgage loans in the Southeast.  Last week, a huge Georgia banker’s bank with similar ugly exposure became the fifth largest bank failure this year.  In January, analysts were already predicting SunTrust would need another $2 billion.  They went back for $1B from TARP, so at this point, I’d guess they’ll need at least $1B.
Current TARP investment: ~$5 billion.

PNC Financial Services Group posted a profit last quarter, mostly on the strength of its acquisition of National City — a move that some say gave the bank a needed capital boost.  Analysts at Keefe, Bruyette and Woods say PNC is likely to need more capital despite cutting dividend payments earlier this year.
Current TARP investment: ~$7.5 billion

And lucky number 10.  Capital One Financial Group is mentioned with some regularity as a bank expected to need additional capital.  Its exposure is largely in credit cards, and as unemployment rises (in the stress tests, it went over 10 percent) so do expected defaults on credit card payments. 
Current TARP exposure: $3.5 billion

Ten banks are expected to have “failed,” or, in the nicer terminology, to need to raise new capital so as to have a nice cushion in case of the economy continuing to decline.  The remaining nine banks are considered variably secure right now, though BB&T is mentioned in several articles as likely to be asked to raise capital, too, and I’m a little surprised that no one thinks GMAC is going to need any further funding.
Current BB&T TARP Investment: ~$3 billion

Current GMAC TARP Investment: $5 billion

The remaining banks (bank holding companies) are:

• J.P. Morgan Chase.  Current TARP Investment: $25 billion
• Goldman Sachs Group.  Current TARP Investment: $10 billion
• Morgan Stanley.  Current TARP Investment: $10 billion
• State Street Corp.  Current TARP Investment: $2 billion
• Bank of New York Mellon.  Current TARP Investment: $3 billion
• American Express Co.  Current TARP Investment: ~$3.4 billion
• MetLife.  No TARP Investment.

Well, so, let’s see what happens now.