Major Banks Negotiate, Spin, Chafe at Stress-Test Results
Friday, May 8, 2009
Some major banks managed to wrest concessions from the government in closed-door negotiations over their "stress tests" that helped them put the best face on their results, financial analysts, industry officials and sources said.
The banks were intent on sending a message that they were strong enough to weather the economic storm and didn't need additional capital infusions from the government that could all but nationalize their franchises.
Citigroup successfully pushed to lower the amount of common equity it needs to raise to $5.5 billion by applying $52.5 billion from capital it has not yet reworked. It also was able to get a credit for the sale of a unit that has not been completed.
The stress tests showed that despite a deepening recession, the government will require only two of the nation's 19 major banks to raise new capital totaling $9.5 billion, far less than what many analysts had projected. The government also is requiring 10 of the largest banks to increase their capital reserves by raising $74.6 billion in common equity, which can be generated by the sale of common stock.
Investors initially were relieved by the generally benign results. But executives were still chafing in conference calls yesterday that their banks didn't end up looking better. Some acknowledged intense negotiations that began after they had learned of their preliminary results about two weeks ago. Several banks were displeased with the amount of capital the government concluded they must raise and lodged their complaints with Fed leaders.
When asked in a call with reporters about its seeming success in the negotiations, Citigroup Chief Financial Officer Edward Kelly said the firm still had issues with the tests. He said the principal difference of opinion centered on revenue the bank would generate if the economy worsened. He declined to discuss the specifics, saying talks with regulators were confidential.
"I can't really tell you how they came up with [their] number. I couldn't tell you even if I knew, which I don't," Kelly said to laughter.
Several banks used the spotlight on the stress tests yesterday to announce plans to sell stock to raise money from private investors. Among them were Wells Fargo, the largest bank in the Washington region by market share, which said it would offer $6 billion in new stock, and Morgan Stanley, which intends to sell $2 billion.
Banks can also increase their common equity levels by converting the government's preferred shares to common shares, but that would dilute existing shareholders and make the Treasury the largest owner in their firms. The department, using bailout funds, has already injected $209 billion into the capital reserves of the stress-tested banks, excluding MetLife.
Officials at Wells Fargo said the company's conclusions were at odds with those of the Fed. They called the government's findings that the firm needs to raise $13.7 billion "excessively conservative."
Wells Fargo chief executive John Stumpf said the company does "not want to be in a position" of seeking to convert the government's preferred shares to common shares, which would give the government a hefty ownership stake. "There's plenty of capital in this company," Stumpf said.
As for the $25 billion from the Troubled Assets Relief Program that Wells Fargo received last year, he said, "We will pay back TARP as soon as it's practical for us to do so."