Ahead of Stress Test Results, Banks Balk at More Federal Aid
Wednesday, April 15, 2009
The nation's largest banks are pressing the government to curtail the next round of federal aid to the financial system, a high-stakes tactic senior officials described as grandstanding that could undermine a necessary rescue.
Federal regulators are racing to assess the health of banks so the government can provide the capital they need. The Obama administration hopes to unveil its appraisal by the first week of May, although sources said the work is in an early phase. An administration official said yesterday that significant information about the financial condition of the banks would be revealed, including how much capital they would have to raise.
Some of the banks in recent weeks have put on demonstrations of strength -- such as Goldman Sachs announcing this week that it would raise $5 billion to pay back federal bailout money -- to make the case that they should be left alone. They are concerned the administration will use the assessments to force them to sell assets at big losses and to accept larger government ownership stakes, hamstringing their ability to recover.
Some senior federal officials counter that company posturing is hiding real problems. They are concerned that some banks are resisting needed help and that others, while strong enough to survive without federal aid, are putting pressure on weaker rivals to the detriment of the broader economy. Other officials have said banks should be allowed to repay the money if they can.
Wall Street Pushes Back
The battle between the government and the 19 banks that were subjected to the administration's "stress test" underscores tensions that are developing as a recovering Wall Street begins to push back against an emboldened Washington.
The stress tests were designed to create a public rationale for a new round of government investments in troubled banks, some senior officials said. After the test results are unveiled, the banks will then have six months to raise private money before going hat in hand to the government.
But the plan is proving difficult to execute. The government has already extended additional rounds of aid to Citigroup and Bank of America. The complexity of that work, and the disputes with the two banks, was described by participants as massive and nearly overwhelming. Now the government is attempting the same task for 19 banks simultaneously.
An issue being intensely discussed within the administration is how much information should be shared publicly about the test results, officials said. No final decision has been made, they said.
Too much disclosure could trigger a run on the weakest banks. But too little could undermine public confidence in the legitimacy of the exercise.
"Whoever you say is not healthy you incite a panic," said Richard Bove, an analyst from Rochdale Securities. "And you can't say they are all healthy. Nobody will believe the stress test meant anything. So if you can't say anything, why the hell are you doing it in the first place?"
Stephanie Cutter, a Treasury spokeswoman, said officials would work with the banks "on how best to release the appropriate data and on what time frame to ensure fairness and minimize market uncertainty."
Taking shows of strength to new heights, the chief financial officer at Goldman Sachs, David Viniar, said yesterday that the company's financial results in the first quarter were so good that it felt a "duty" to repay the government's aid of $10 billion.