TOPICS > Economy

Government ‘Stress Tests’ Find Big Banks Need $75 Billion

May 7, 2009 at 6:00 PM EDT
Loading the player...
The U.S. Treasury released stress tests of 19 major banks, finding that they collectively need another $75 billion by November. A financial reporter explains the results.

JUDY WOODRUFF: This was the day the U.S. government named names and numbers in the financial industry. Regulators made public the conclusions of bank stress tests.

NewsHour correspondent Kwame Holman has our lead story report.

KWAME HOLMAN: The results confirmed reports that several of the nation’s largest banks still need capital infusions to ride out the global financial crisis.

ERIN BURNETT, CNBC Anchor: Seven of the banks reportedly need money. Will their CEOs soon be begging, too, for a job?

KWAME HOLMAN: The months-long stress tests had been the subject of rampant speculation and frequent disclosures to the press.

TV ANCHOR: … on those bank stress tests, although a lot of that information has already leaked out.

KWAME HOLMAN: This morning, via satellite, Federal Reserve Chairman Ben Bernanke told a Chicago conference it was vital to find out what happens if the recession gets even worse.

BEN BERNANKE, Federal Reserve Chairman: Suppose that the economy performs worse than we currently expect. Suppose that the unemployment rate is higher, that house prices decline more quickly, and, in general, conditions are worse than currently expected. Will banks still be able to have enough capital so that they are both well capitalized and able to lend and support economic recovery? And so that was the way we sized the capital buffer that is needed.

KWAME HOLMAN: Overall, the testing showed 19 banks scrutinized require less new money than expected, around $75 billion.

Bank of America, which received $45 billion in government relief under the so-called TARP program, will need an additional $34 billion. Citigroup, which also is a $45 billion recipient of TARP money, will need an additional $5.5 billion in capital.

San Francisco-based Wells Fargo got $25 billion from taxpayers and is judged to need nearly $14 billion more. The financial arm of General Motors, GMAC, took $5 billion in assistance, but needs more than twice that after the stress test review.

But several of the largest banks were seen to be in comparatively good health. JPMorgan and Goldman Sachs, which took $25 billion and $10 billion respectively in TARP funds, need no additional capital.

And American Express, Capital One, and MetLife also are in the clear.

Last evening, Treasury Secretary Timothy Geithner told PBS’s Charlie Rose he sees further government intervention as a last resort and that, overall, the banks are in much better shape than when the financial crisis began.

TIMOTHY GEITHNER, Treasury Secretary: But this is not a solvency thing. There’s very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward.

This is designed to make sure that the economy will be able to benefit from larger lending capacity going forward in the event we were to face greater uncertainty again about a deeper recession.

So it’s like insurance — again, it’s like insurance, precautionary insurance against the risk of a deeper recession.

KWAME HOLMAN: And today, Geithner rejected criticism the stress testing either was too tough or too easy on the banks. He wrote in the New York Times, it tried to “strike the right balance.”

TIMOTHY GEITHNER: Banks are going to be able to get back to the business of banking.

BARACK OBAMA, President of the United States: Americans are responding to difficult economic times…

KWAME HOLMAN: But should worse come to worst, new details on the president’s budget today included a further possible government lifeline. Mr. Obama asked for a $250 billion placeholder in next year’s federal outlays for financial rescues. That would bring the U.S. government’s direct investment in the financial sector to nearly $1 trillion.

What stress tests measure

Deborah Solomon
The Wall Street Journal
This is the kind of test you want in college: Nobody failed.

JUDY WOODRUFF: Jeffrey Brown has more about the tests and the results.

JEFFREY BROWN: And for that, we turn to Deborah Solomon of the Wall Street Journal.

Deborah, it might be useful first to explain a bit more about what a stress test really is. What exactly is being measured here?

DEBORAH SOLOMON, Wall Street Journal: Well, they're looking at all sorts of things that the banks and investors have been worried about, which is things like how much exposure they have to the real estate market, how much exposure they have to credit cards that have gone bad, how much exposure they have to commercial real estate.

So all of the things that have sort of been impacted during the financial crisis that we've seen a lot of problems in, they wanted to find out exactly what the exposure of these banks was and what potential losses might mount if the recession gets worse.

JEFFREY BROWN: Now, we just heard a little in Kwame's piece from some high officials. You were just at a briefing with some of them. What was the tone? Or did they present this as a better-than-expected positive report?

DEBORAH SOLOMON: I mean, they were sort of muted about it. They say that, you know, the banks have enough capital right now, but that, you know, this is not the end of the financial crisis, that this is just something that's going to enable these banks to withstand any future shocks that we might see.

And, you know, Timothy Geithner, the treasury secretary, said that, you know, we face challenges ahead, we've got a lot more work to do.

So they weren't necessarily painting this as a turning point so much as just something to give the markets confidence, investors confidence, and the banks confidence that they can continue to lend.

JEFFREY BROWN: Well, help us flesh out a bit these categories that they've now created among banks. Those that came out well here, what does that mean for them? What can they now do?

DEBORAH SOLOMON: Well, that means, in essence, that they can raise money in the private sector more easily, but they can also repay their TARP money, which a lot of these banks want to do.

I mean, you know, we're talking about infusing more money into some banks. Meanwhile, other banks, like Goldman Sachs and JPMorgan, want to get out from under the government's tentacles because of restrictions that have been imposed on things like pay and dividends and stock buyback. So you're, you know, creating two categories of banks.

Now, one of the things people were worried about was, you know, painting weak banks versus strong banks. This sort of -- this does that. I mean, you're able to see who's the strong and who's the weak.

But what the government is hoping is that by being transparent about what the future losses are that people won't be, you know, too worried about the ability of a Bank of America going forward or Citigroup going forward, that if you can see exactly what their exposure is in different areas, that you'll feel more comfortable with the health of the overall bank, and, they say, you know, that no bank today is insolvent, no bank today has capital problems.

I mean, this is the kind of test you want in college: Nobody failed.

Categorizing the banks

Deborah Solomon
The Wall Street Journal
Timothy Geithner said today, "We want banks to get back to the business of banking." I think they want banks that need money to shed assets that are not core to their mission.

JEFFREY BROWN: Well, but those banks -- but tell us more about the second category of the weaker banks. Now, there's a number that will have to raise new capital, but the idea, I guess the hope is that they will not have to turn to the government, they can do it privately.

Explain a little bit about particularly this notion of converting preferred shares that they got through the TARP into common stock. Tell us what that means.

DEBORAH SOLOMON: Right, well, one of the things that's important to remember here -- and it's a little complicated -- is that many of these banks don't actually need more capital. They need a different kind of capital. They need the kind of capital that regulators and investors are worried about.

It's called common capital. And, essentially, it's the first line of defenses against losses. It protects the bank against losses, and a lot of banks have capital, but they just don't have the right mix of capital.

And the Fed Chairman Ben Bernanke said today that they are more focused on this type of capital because of, you know, expected or estimated losses. So what they want banks to do is make sure that they have that right type of capital.

So what a lot of the banks are going to be able to do is not get new money, but be able to convert preferred shares into shares that sort of reflect this common equity.

So they can do that in one of two ways. They can get private investors who already have preferred stakes in the companies to convert those stakes into common equity or they can go to the government and, with those TARP funds, the preferred stakes that they sold to Treasury for those TARP funds, they can ask the Treasury to convert those into common equity, so in essence -- the upshot here is that they may not actually need more money from the government or more money from investors, just a different type of money.

JEFFREY BROWN: And we're already starting to get some reports on the wire from companies -- from banks saying they're going to do just that. What about the -- there's a weakest category, however. I mean, is it possible that some are still going to have to sell assets or take more dramatic action or go to the government?

DEBORAH SOLOMON: Yes. Yes. And I think government actually wants some of these banks to sell non-core assets. They want banks -- Timothy Geithner said today, "We want banks to get back to the business of banking." I think they want banks that need money to shed assets that are not core to their mission.

So I think you're going to see some shrinking of the banking sector, in terms of getting back to, you know, core banking.

But some banks are going to need to go back to the government for a second helping. And in those cases, the government may wind up taking a significant stake in some of these companies. And that's going to raise issues about governance. How active an investor will the government be? Will they micromanage the company?

President Obama said, you know, earlier this week that they don't want to be in the business of running these companies. That said, when you have a significant stake in these companies, you're going to have to have some say in how they operate.

Particular weaknesses exposed

Deborah Solomon
The Wall Street Journal
It's interesting to see which banks are exposed to which type of losses in which categories. Morgan Stanley has a significant exposure to the commercial real estate market, which many people didn't know.

JEFFREY BROWN: You know, there was so much focus on the list of banks, and I know there was the expectation that there would be a wealth of other information in this. And you and I had talked about it on this show, that this would be a chance to see some of that information.

I imagine you're still processing this because it just came out, but has anything jumped out at you beyond the list of banks and the specific capitalization that they need?

DEBORAH SOLOMON: Well, I mean, it's interesting to see which banks are exposed to which type of losses in which categories.

Morgan Stanley has a significant exposure to the commercial real estate market, which many people didn't know. So, you know, what's interesting about this data is it sort of shows you exactly where certain banks are, you know, basically exposed. So that's one interesting thing.

The other interesting thing is that there seems to have been a lot of pushback from the banks. You know, there was sort of this negotiation process that the government went through with the banks over a week period. The banks got their initial stress test results back, and the government, you know, sort of worked with them on that.

One interesting thing is that they were essentially going to stop at the end of 2008 when they looked at potential losses. But in 2009, some banks took steps to mitigate some of the problems, and so the government basically used some of those new numbers, which helped shrink the capital hole from about $185 billion to $75 billion.

JEFFREY BROWN: All right, Deborah Solomon of the Wall Street Journal, thank you very much again.