Bank 'stress test' decision due this week.
Results of bank stress tests by the government are due this Thursday, May 7. According to the most recent reports about pending results of the Federal Reserves “stress test” to determine the soundness (or lack thereof) of bank balance sheets, at least six of the 19 largest U.S. banks will require additional capital. In particular, analysts note, two of the largest national banks — CitiGroup (Citi) and Bank of America (BofA) — will likely require additional federal bailout funds.
On Sunday the Financial Times (FT), citing people close to the situation, said that Citi, BofA and at least two other banks are staging last-ditch lobbying efforts, set to resume on Monday, to convince the U.S. Treasury and Federal Reserve that the findings of “stress tests” into their financial health were needlessly pessimistic. But hedging its bet, BofA is working on plans to raise more than $10 billion in fresh capital, even as it and Citi continue attempts to convince the U.S. government that they do not need to bolster their balance sheets, FT reported.
While some of the lenders may need extra cash injections from the government, Washington will more likely require most of the capital 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 by changing accounting rules 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 the public mood toward Wall Street and Congress on the bailouts.
Meanwhile Warren Buffet, an advisor to the Obama administration and a widely respected investor, publicly criticised the governments bank bailout plan saying the plan was flawed and does not properly assess the banks’ financial health. Buffets firm, Berkshire Hathaway, owns financial interests in three large banks — Wells Fargo & Co, U.S. Bancorp and SunTrust Banks Inc. — are among 19 large banks the U.S. government is stress testing. In addition, some critics indicate that U.S. Treasury Secretary, Timothy Geithner, who was previously the New York Federal Reserve president, is too intimately tied to Wall Street’s banking oligarchs and is losing the battle of wills to the Wall Street lobby contrary to the public will. Leading economists ranging the political spectrum — from Niall Freguson to Paul Krugman (see video here) — have provided compelling analyses indicating that the Obama administration’s bank bailout plan is doomed to fail; and two of Sweden’s successful bank nationalization architects have criticized the plan.
By contrast, the United States government, so far, has bailed out banks without receiving large equity stakes in return, said Bo Lundgren, Sweden’s minister of fiscal and financial affairs during the Swedish bank takeover. “For me, that is a problem,” Mr. Lundgren, who called himself more of a free marketer than some Republicans, told The NY Times. “If you go in with capital, you should have full voting rights,” ‘ it will not work in the long-term.
