U.S. to Wind Down Help for Some Banks

By Binyamin Appelbaum and Neil Irwin
Washington Post Staff Writers
Friday, May 8, 2009

The government signaled yesterday that its financial rescue efforts may have reached their high-water mark, announcing that the much-anticipated "stress tests" of 19 large banks showed that only one, GMAC, was likely to need additional taxpayer aid and that it would begin to unwind assistance for the healthiest firms.

Despite a deepening recession and projections that banks will continue to lose money, the government will require the firms to increase their combined capital by as little as $9.5 billion. The government will require the banks to further strengthen their capacity to absorb losses by adding $74.6 billion to the portion of their capital that comes from common equity. Banks are likely to raise some of that money from investors and some by converting other forms of capital.

The announcement at the Treasury Department yesterday culminated a three-month process designed to show that banks are returning to health after a crisis that left much of theindustry dependent on federal aid.

Officials said that banks continue to hold vast quantities of ill-considered loans and could suffer losses totaling $600 billion over the next 20 months as the borrowers default. But in showing that the banks can absorb those losses, the administration hopes to restore investors' confidence. If banks can start raising money again, they can increase lending to consumers and small businesses, a critical piece in the government's broader strategy for renewing economic growth.

"With the clarity provided by today's announcement, banks should be able to get back to the business of banking," said Treasury Secretary Timothy F. Geithner.

First, however, the banks must respond to the results.

The government's demand that 10 of the banks raise billions in common equity creates a virtual referendum on nationalization. The banks have six months to persuade private investors to buy new shares of their common stock, or else the firms could be forced to grant the Treasury a voting ownership stake.

Financial analysts said they regard the success of those stock sales as a critical indicator of whether the stress tests have restored the market's confidence in the companies. The government hopes to show it does not need to take a stake in banks beyond Citigroup and GMAC.

There may not be a long wait to find out. Two banks said last night that they would issue $8 billion in common shares immediately.

While the banking industry will remain on federal aid for the foreseeable future, officials also said they would now allow some of the healthiest banks to repay the government's initial capital investments. Nine of the 19 banks were found to have sufficient capital reserves. Firms that repay the government no longer face restrictions on executive compensation.

Applicants will first be required to show that they do not need the shelter of a Federal Deposit Insurance Corp. program that helps banks raise money at lower interest rates. But banks may continue borrowing from the Federal Reserve's emergency programs, which do not impose pay restrictions.

Geithner said yesterday that regulators saw the Fed programs as serving a different purpose.

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