Fed Determines Banks Need $74.6 billion in Fantasyland Scenario, $599 Billion in Cakewalk Scenario

The Federal Reserve determined that 10 U.S. banks need to raise a total of $74.6 billion in capital, concluding its unprecedented probe of the health of the nation’s 19 largest lenders.

The results showed that losses at the banks under ‘more adverse” economic conditions than most economists anticipate could total $599.2 billion over two years. Mortgage losses present the biggest part of the risk, at $185.5 billion. Trading accounts were the second-largest vulnerability, with potential losses of $99.3 billion.

“The results released today should provide considerable comfort to investors and the public,” Fed Chairman Ben S. Bernanke said in a statement. “The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario.”

My Comment: The results cannot and will not provide "considerable comfort" because the stress test parameters were a cakewalk. In the so called "adverse scenario" the Fed concluded unemployment would peak at 10.3% at the end of 2010 and GDP would fall 3.3% this year. I think we see the unemployment rate at 9.8% by August and 11% by the end of 2009. The adverse scenario is my baseline scenario. The results are skewed from the start as the baseline scenario is pure fantasy.

Capital Shortfalls

Bank of America Corp. was judged to need $33.9 billion in additional capital under regulators’ criteria, the largest gap. Wells Fargo & Co.’s shortfall is $13.7 billion, while Citigroup Inc.’s gap is $5.5 billion. New York-based Citigroup has already announced plans to bolster its tangible common equity ratio by converting some of its preferred shares into common stock.

Fifth Third Bancorp’s capital need is $1.1 billion, KeyCorp’s is $1.8 billion, PNC Financial Services Group Inc.’s is $600 million, Regions Financial Corp.’s is $2.5 billion and SunTrust Banks Inc.’s is $2.2 billion. GMAC LLC needs $11.5 billion, while Morgan Stanley’s assessment was $1.8 billion.

Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of New York Mellon Corp., MetLife Inc., American Express, State Street Corp., BB&T Corp., US Bancorp and Capital One Financial Corp. were deemed not to need additional funds, according to the results.

Residential mortgages and consumer loans, including credit cards, “account for $322 billion, or 70 percent of the loan losses projected under the more adverse scenario,” the Fed said in its report.

Banks that need to raise capital under the government’s stress tests will have until June 8 to develop a plan and until Nov. 9 to implement it.

“The doomsday predictions in January and February that banks were insolvent is just wrong,” David Trone, senior analyst at Fox-Pitt Kelton Cochran Caronia Waller, said before the announcement. The tests “did succeed in genuinely stressing the banks and I think that would give confidence to people.”

The banks were insolvent and many still are. The Fed has thrown $trillions at this mess and the banks remain short of capital. If you are depending on research from Fox-Pitt Kelton Cochran Caronia Waller, you need a new analyst.

Wells Fargo, Morgan Stanley Boost Capital After Test

Bloomberg is reporting Wells Fargo, Morgan Stanley Boost Capital After Test.

Wells Fargo & Co., Citigroup Inc., Bank of America Corp., Morgan Stanley and Regions Financial Corp. are selling stock and debt and converting preferred shares to add capital after the U.S. stress test found the banks had too little common equity to withstand a prolonged recession.

Wells Fargo said today it will sell $6 billion of common stock to the public, Morgan Stanley aims to raise $5 billion by selling stocks and bonds and Citigroup is exchanging an additional $5.5 billion of preferred securities into common stock. Regions Financial said it’s studying options to raise $2.5 billion, and Bank of America will sell common stock.

Wells Fargo, the biggest U.S. mortgage originator, must raise $13.7 billion, the government said today. The San Francisco-based lender may face losses for 2009 and 2010 of $86.1 billion, or 8.8 percent of total loans.

Bank of America

Bank of America, the largest U.S. bank, needs $33.9 billion, according to the government. It could have losses during the next two years of $136.6 billion, or 10 percent of total loans.

The bank, based in Charlotte, North Carolina, plans to sell common stock and convert preferred shares into common equity, Chief Financial Officer Joe Price said in a statement. The bank is considering the sale of its Columbia Management mutual fund group and may consider joint ventures, according to the statement.

“We are comfortable with our current capital position in the present economic environment,” Chief Executive Officer Kenneth Lewis said. “The stress test asks what if the economy does much worse than most experts project.”

Ken Lewis is thoroughly discredited and should resign. Better yet, Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis.

Goldman, Morgan Stanley, others see repaying TARP soon

After today’s cakewalk, Goldman, Morgan Stanley, others see repaying TARP soon.

Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N), JPMorgan Chase & Co (JPM.N) and several other big U.S. banks said they were in a position to quickly repay Treasury capital injections after regulators released bank stress test results.

Goldman, which passed the test, said it believed it had met all requirements and was "highly confident that we will soon repay the government’s investment from the TARP’s Capital Purchase Program."

JPMorgan also believes it is eligible to repay the $25 billion it has received in taxpayer money, Chief Executive Jamie Dimon said on a conference call with analysts.

"We will be in that process as soon as we can," said Dimon, who has repeatedly said that the bank did not want to take the funds in the first place.

Shares in the second largest U.S. bank sank more than 5 percent to $35.24 in regular trading and climbed slightly after hours to $35.85.

Morgan Stanley, even as it was directed to boost capital by $1.8 billion, said it too expected to repay its $10 billion in TARP funds "as soon as possible."

Morgan announced it would sell $2 billion in stock and $3 billion in 5- and 10-year notes not guaranteed by the FDIC. The debt sale is "multiple times" oversubscribed, sources said.

American Express Co (AXP), Bank of New York Mellon (BK), State Street Corp (STT), U.S. Bancorp (USB) and BB&T Corp (BBT) said they would seek to repay TARP as soon as they were permitted by regulators.

Citigroup (C), which was found to have a $5.5 billion capital shortfall, said it would repay the $45 billion it got from Treasury as soon as soon as possible.

Those who want to delve into the details of the stress test can do by reading The Supervisory Capital Assessment Program: Overview of Results.

Well capitalized or not, banks want to pay back TARP funds to escape conditions the Fed attached to the money. CEOs are all itching to give themselves big raises.

Since Bernanke is willing to brag “The examiners found that nearly all the banks that were evaluated have enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical adverse scenario.”, I say prove it by canceling the fraudulent Public Private Investment Plan (PPIP) taxpayer ripoff.

Mike "Mish" Shedlock