April 29 — According to reports coming out of Washington and New York, 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, Washington will more likely require that most of the capital will come from converting Preferred shares — which the government received in return for Federal bailout money — into common equity. This action would, in effect, make the Federal government the largest shareholder in each of the affected companies, effectively “Nationalizing” those banks.
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 — despite allowing accounting gimmicks to give the appearance of profitability. By pushing conversions, rather than federal monetary 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. Read full Bloomberg report here.