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Major Banks Negotiate, Spin, Chafe at Stress-Test Results

By David Cho, Tomoeh Murakami Tse and Brady Dennis
Washington Post Staff Writers
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."

Richard Bove, an analyst with Rochdale Securities, said Wells Fargo got an especially rough deal, considering that it stepped in to take a struggling Wachovia off the government's hands last year. Wells Fargo raised more than $11 billion so that it could buy Wachovia. "They did the government a massive favor," Bove said. "And the government returned it by saying: 'Screw you. Go out and raise more capital.' "

The firm identified as having the biggest capital needs, Bank of America, said it would seek to avoid government aid at all costs.

In a conference call with analysts last night, Bank of America officials said they would sell businesses to help raise about $10 billion and swap preferred shares held by private investors for common shares to raise an additional $17 billion.

The firm's performance in the next few months will provide an additional $7 billion, said Joe Price, Bank of America's finance chief.

Capital One, which has the most bank branches in the Washington area, said it won't need to raise more capital. The firm said it is working toward repaying the $3.6 billion in taxpayer money it received last fall.

Chief executive Richard D. Fairbank said in a statement that he was content with the stress-test results. They "confirm the strength and resilience of our capital," he said. The firm would not make company officials available to comment.

Officials at Regions Bank did not return calls for comment. It and GMAC were the only two firms that do not have enough funds to meet the capital needs cited by the Fed.

Regions Bank said in a statement that it remains "strong and stable," and that while it "disagrees with the assessment" of the Fed on the need for an additional $2.5 billion in common equity, it is committed to meeting the requirement.

Staff writers Renae Merle and Zachary A. Goldfarb contributed to this report.

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